Finance Leases: Accounting, Manufacturer/Dealer Lessors & Gali Ltd

This assignment provides a comprehensive overview of accounting for finance leases by manufacturer or dealer lessors, adhering to AASB 16 standards. It distinguishes between finance and operating leases, highlighting the importance of proper calculation for lessors, focusing on benefits such as ownership preservation, tax advantages, and high profitability. The assignment details the balance sheet, income statement, and cash flow statement treatments for finance leases, emphasizing the impact on assets, liabilities, and working capital. A practical application is presented through a case study of Gali Ltd, demonstrating the computation of impairment loss, including journal entries and asset allocation, ensuring compliance with accounting principles. Desklib offers a wealth of similar solved assignments and study resources for students.

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

ACCOUNTING 3
dealer lessor from the book value of the leased asset. The amount of asset is reduces in the
books of accounts in the total of assets.
Income statement
In the financial lease, the amount of interest revenue is recorded in the income statement of
the manufacturer or dealer lessor. The amount of interest is calculated on the basis of lease
receivable at the beginning using the interest rate in the lease (Gao, 2018).
Cash Flow statement
The interest component of the lease revenue is recorded in the cash flow statement as an
operating cash flow by manufacturer. The principal component of payment is recorded under
the investing activity of the cash flow statement of manufacturer (Finance Management,
2018b).
As per the AASB16, since a finance lease is capitalised, the asset and liabilities of the
manufacturer is increases in the balance sheet. In this case, working capital decreases but the
debt and equity ratio is increases. The expenses of finance lease are allocated between the
interest expenses and the principal value (Bentleys, 2019).
Conclusion
From the above analysis, it is founded that the calculation of Finance lease is important for
the manufacturer in order to ensure the regular income. Preservation of Ownership, Benefits
of Tax, High profitability, Recovery of Investment, and High potentiality of growth are
benefits which can be enjoy by the manufacturer by calculating the finance lease. It is
observed that the financial lease is different from the operating lease in the terms of
calculation. The treatment of finance lease is described in the report which reflects that the

ACCOUNTING 4
assets and liabilities of the company are affected. The lease revenue is recorded in the
different way in the different statements.

ACCOUNTING 5
Part B
Computation of the Impairment Loss of Gali Ltd
A. Carrying amount of cash generating unit including goodwill
Amount ($)
Equipment 1,02,700.00
Patent 24,000.00
Building 15,000.00
Goodwill 5,000.00
A. Total 1,46,700.00
B. Recoverable amount 99,076.00
C. Impairment Loss (A-B) 47,624.00
Account Titles Debit Credit
Impairment Loss 47,624.00
Goodwill 5,000.00
Equipment (note below) 30,892.62
Patent (42624/(24000+15000+102700)*24000) 7,219.31
Building
(42624/(24000+15000+102700)*15000) 4,512.07
Inventory
(Being impairment loss recognized)
Profit and Loss
1,46,700.0
0
Impairment Loss
1,46,700.0
0
(Being impairment loss charged to profit and loss
account)
Impairment on equipment individually 35000
102700-137700
Allocated impairment of CGU 30,892.62
42624/(102700+15000+24000)*102700

ACCOUNTING 6
Note
The value of Equipment is calculated and the 35000 is come as an impairment loss. The
allocation amount should not be more than by 35000 and it is noted that the allocation
amount of the asset is in the proportion of their carrying amount (Ready Ratio, 2018). The
allocated amount of equipment is calculated is 30892.

ACCOUNTING 7
References
Bentleys. (2019) New leases accounting standard – how different will your balance sheet
look?. [online] Available from: https://www.bentleys.com.au/knowledge-centre/new-leases-
accounting-standard/[Accessed 27/1/12].
Caselli, S. and Gatti, S. eds. (2017) Structured finance: Techniques, products and market.
UK: Springer.
Finance Management. (2018a) Difference between Operating and Financial Lease. ?.
[online] Available from: https://efinancemanagement.com/sources-of-finance/difference-
between-operating-and-financial-lease [Accessed 27/1/12].
Finance Management. (2018b) Lease Accounting by Lessee and Lessor. [online] Available
from: https://efinancemanagement.com/financial-accounting/lease-accounting-by-lessee-and-
lessor [Accessed 27/1/12].
Gao, S.S. (2018) International leasing: strategy and decision. Oxon: Routledge.
Lease Accounting. (2018) What is a lease?. [online] Available from:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/lease-accounting/
[Accessed 27/1/12].
Ready Ratio. (2018) International Financial Reporting Tool. [online] Available from:
https://www.readyratios.com/reference/accounting/financial_lease_.html [Accessed 27/1/12].
Roberts, R. (2015) Finance for small and entrepreneurial business. Oxon: Routledge.

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