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Compare Sales-type Lease and Direct Financing Lease

Sales-type leases and direct financing leases are two of the classifications of leases described in FASB codification, from the standpoint of the lessor.

Compare and contrast a sales-type lease with a direct financing lease as follows:

Gross investment in the lease.
Amortization of unearned interest income.
Manufacturer's or dealer's profit.

Do not discuss the criteria for distinguishing between the leases described above and operating leases.

Solution Preview

Gross investment in the lease: For both types of leases, "The minimum lease payments (net of amounts, if any, included therein with respect to executory costs such as maintenance, taxes, and insurance to be paid by the lessor, together with any profit thereon) plus the unguaranteed residual value ... accruing to the benefit of the lessor shall be recorded as the gross investment in the lease."

Amortization of unearned interest income: For a sales-type lease, "The difference between the gross investment in the lease ... and the sum of the present values of the two components of the gross investment shall be recorded as unearned income. The discount rate to be used ...

Solution Summary

Citing authoritative sources, this solution compares a sales-type lease to a direct financing lease regarding the gross investment in the lease, the amortization of unearned interest income, and the manufacturer's or dealer's profit.