Lease Payments at the beginnig of a period

CFA Level II
#1

Hey guys, stupid doubt for you:

Doing some exercises about capital leasing - in the lessor perspective - when the payments are received on 1 January i don’t understand pretty much the timing of the interest recognition. For example, a 4-payment leasing of a 100,000 asset has the following payment schedule:

Y1 - January 1 - Principal 28679 and Interest 0

Y2 - January 1 - Principal 21547 and Interest 7132

Y3 - January 1 - Principal 23702 and Interest 4977

Y4 - January 1 - Principal 26072 and Interest 2607

However, for a direct financing lease, the question recognize the 7132 as Lease Revenue of Year 1. Why is that?

Thank you very much!

#2

Accrual accounting: they earned the revenue in year 1.

In their year 1 income statement they’ll show Lease Revenue of 7,132, and on their year 1 balance sheet they’ll show Accounts Receivable of 7,132. No different than if they’d sold something in year 1 on account: they show the income in the year they earn it, not in the year in which its paid.

#3

It makes sense. Thanks.

#4

My pleasure.