Accounting for Finance Lease by Manufacturer or Dealer Lessor

Finance Lease

ACCOUNTING 1
Part A
Introduction
Lease is the contract in which the owner of property/asset allows the other party to use the
property in the exchange of money or the other assets (Lease Accounting, 2018). The lessor
charges a rent from the lease on the asset as for hiring the asset. Lessor is the owner of the
asset and the lessee is one who uses the asset by paying rent on it. The lessee is the
responsible to make rental payment that cover on the behalf of use of the asset. The lessor
recovers their investment amount from the lease amount. The company buys the assets for
use on rent for the specific period of time. There are two types of lease in the accounting are
Finance lease and Operating lease (Roberts, 2015). Operating and finance lease are the types
of lease but have different calculation in the books of accounts. As per the AASB, lease is an
16th accounting standard of accounting in Accounting. In this report, the discussion is made
on the “Accounting for finance Lease by Manufacturer or dealer lessor”.
Finance Lease
Finance lease is a way of computing the lease in order to provide the lease in an effective
manner to the lease company on the basis of buys the asset. In the case of finance lease, risk
and all rewards are transfer to the ownership to the lessee. In the finance lease, the lessee
record the asset in their books but the manufacturer lessor credits the asset in its books.
Financial lease provide a purchase option to the lessee at less than the fair market value of the
asset. In the financial lease, lessee is responsible to bears the insurance, tax and maintenance
charges. The running and administration expenses are higher and are born by the lessee. The
lease is charged on the Plant, Machinery, Land, Office, and Building.
Difference between the Finance and Operating lease

ACCOUNTING 2
Finance lease is somewhat different from the operating lease in the terms of calculation.
Operation lease is a different way to calculate the effective lease in an appropriate manner. In
the case of operating lease, the ownership of the assets and all the risk and rewards are not
transfer to the lessee. It remains with the lessor that is why the calculation of both the terms is
different. Operating lease is treated as rent but finance lease is considered as a loan (Finance
Management, 2018a).
Importance of calculation of Financial Lease by manufacturer or Dealer Lessor
There are many advantages of financial lease which states that the company has to lessor has
to calculate the lease amount. Preservation of Ownership, High potentiality of growth,
Recovery of Investment, Benefits of Tax, and High profitability are the benefits which helps
the company in reduce the risk and earns the high revenue. Financial lease is the kind of loan
that is why the ownership is transfer to the lessee so that the loss of asset is consider as the
loss of lessee not for the lessor.
Calculation of Finance lease by Manufacturer or dealer lessor
The finance lease is also divided in two parts in order to calculate the effective amount of
finance lease. The present value of lease is same as the carrying value than it is the called the
Direct Financing Lease. If the present value of the lease is more than the carrying amount
than it called the Sales type lease. Both the situation of lease is recorded by the manufactuer
lessors in his different financial statements (Caselli, and Gatti, S. 2017).
Balance sheet
In the balance sheet, manufacture lessor records the amount receivable. It adds the value in
the sheet which is receivable in the future. The assets are reduced by the manufacturer or