Finance Lease (lessor)

(lessor perspective) (1st payment received of 10000 = 2000 interest portion + 8000 principal repayment) “how” does the lessor puts the principal repayment in the income statement? It is still a revenue right? how can he only report the interest portion of the lease payment in the income statement if he receives 10000 from the lesee…? he reports 2000 as CFO+ and 8000 as CFI+ i just don’t get where do the 8000 go in the income statement… any help welcome…many thanks

Lease receivables on the bs is reduced by the principal component, so i guess on the income statement it will be a 8000 gain on lease payments or something like that.

I think there is no 8000 in the income statement it is pure asset operation (increase cash, decrease receivables)

I thought the 8000 only goes towards reducing the lease receivable on the BS, not anywhere on the IS. Wouldn’t this happen: Receives 8000 cash so ASSETS increase by that amount. Lease Receivable is an ASSET which decreases by that amount too, net effect of zero. Am I right?

i guess thats right…apart frm 2000 as interest in cfo and 8000 as principal repayment in cff…the principal portion will reduce the lease recievable frm the balance sheet(asset decreases)…i dont think principal repayment will go in income statement…please some 1 frm accounting bacnkgrnd…throw some light…

Just read this section for the 2nd time There is no $8000 going to the income statment because is not revenue. They credit the equipment asset account ( removing the asset from captal asset) and debit lease recievables (which is still an asset account). So every time they get a payment towards the principle they deduct ( credit) lease recievables and increase cash (debit). That is how it gets on to cashflow stmt and never hits revenue or income stmt. I wish that CFAI would have T-Account expinations becuase it is difficult to learn this stuff with out seeing the debits and credits for each account. Hope this helps!!

many thanks everyone! principal repayment is CFI, not CFF… so many things to learn…!!!

Finance lease ? , to me it looks like sales type lease for lessor and capital lease for lessee . In Sales type lease you realize two profits (manufacturing profit and financing profit) and remember the total return on investment(manufacturing profit) is realized at “sale” and only interest is realized after that . In income statement : At sale we realize profit = sale(PV of lease payments) - COGS and COGS = Cost of Asset - PV of Salvage and that amount goes to CFO , but there isn’t any cash , so same amount is deducted from CFI , such that net cash flow remains the same . and since the total Investment profit has passed through income statement once at sale only interest need to pass through income statement now , so this CFI(part of regular payment of lesse) , doesn’t pass through income statement only change it does is in Balance sheet , cash --> Cash + CFI and Investment(asset) --> Investment - CFI and interest income = Investment*discount rate CFI = Lesse payment - interest income so at end your investment will be worth Salvage , and if sold will go to CFI . One more analogy is , basically you have asset in your balance sheet which you have sold so you need to dispose it regularly to lessee , that disposal is CFI .

Btw it’s mixture of what i have read from schwser and what i think , please correct me if i missed something somewhere .