Can someone explain the difference between the two? How do you differentiate between the two if given a data table with the leasing terms? Thanks
sales type lease: PV of the lease payments > the carrying value of the lease asset In sales type lease the lessor recognizes profit at the inception of the lease profit= PV of lease cash flows - carrrying value of the asset Direct Financing Lease: PV of lease payments= the carrying value of the leased asset No profit is recognized in direct financing lease.
I am not sure nut i think in sales type u recognize profit on the leased item as well as interest income ,while for the direct financing it is just interst revenue
parac0da Wrote: ------------------------------------------------------- > I am not sure nut i think in sales type u > recognize profit on the leased item as well as > interest income ,while for the direct financing it > is just interst revenue Present value of cash flows in sales type lease is greater than the present value of cash flows in direct financing lease. In both cases at the inception of lease, a lease account recievable is created which is equal to the present value of cash flows. then the interest payment = lease account recievable * interest rate. since lease account receivable is greater in sales type lease so the interest payments are bigger.
Thanks guys.
ahh… there is an issue with the statement i wrote above, the lease receivable will be same in both cases, so the interest payment would be the same in both leases the only difference is the profit which is recognized in sales type lease. Balance sheet affect of both the lease is same, only the income statement differs.
What are the implications on CFO/CFI, and all that good stuff. Is the profit CFI or CFO, and the interest payments? I assume both are added (subtracted) to NI? There is alot of ambiguity in the schweser readings regarding this, and I keep getting spanked by questions asking for detail.
dats completely true…shweser has tripped me too on this entire study session 9 of fsa…
[What are the implications on CFO/CFI, and all that good stuff. Is the profit CFI or CFO, and the interest payments? I assume both are added (subtracted) to NI? There is alot of ambiguity in the schweser readings regarding this, and I keep getting spanked by questions asking for detail.] Both the Profit and the Interest Revenue should be considered as Operating Income for the Lessor, and would be part of CFO since it is part of its primary operations. I am not 100% sure, but I believe that this is going to happen.
The cash flow differences between operating, capital-direct financing, and capital-sale type leases can be confusing. core-models.com has as one of their models a clear and interactive explanation of the differences in the 3 financial statements (balance sheet, income statement, and cash flow statement) between the different lease methods. It will definitely help you fully understand the difference.
Caldrone Wrote: ------------------------------------------------------- > The cash flow differences between operating, > capital-direct financing, and capital-sale type > leases can be confusing. core-models.com has as > one of their models a clear and interactive > explanation of the differences in the 3 financial > statements (balance sheet, income statement, and > cash flow statement) between the different lease > methods. It will definitely help you fully > understand the difference. Thanks Caldrone! core-models helped clear the leasing issue up for me!!! Now I can go back and review ethics, I have a feeling that’s what going to hurt me on the exam.