The net investment in the lease is equal to the gross investment, plus any unamortized initial direct costs, minus unearned income. The unguaranteed residual value is the expected value of the leased asset in excess of the guaranteed residual value at the end of the lease term (SFAS 13).

What is the proper treatment of guaranteed residual value from the viewpoint of the lessor?

Unlike unguaranteed residual value , guaranteed residual value is included in the calculation of MLPs and treated as an additional lease payment to be made at the end of the lease term.

Does lessor record depreciation?

The lessor records depreciation expense over the life of the asset. Under a capital lease, the lessor credits owned assets and debits a lease-receivable account for the present value of the rents.

Do capital leases have residual value?

In short, residual value is the estimated fair value of the leased asset at the end of the lease, and can be either guaranteed or unguaranteed by the lessee. But before that, I would do a quick overview on some elements of a capital lease which is important to enable you to understand computation main topic.

What is expected residual value?

Definition: The residual value is the amount that a company expects to receive for an asset at the end of its service life less any anticipated disposal costs. In accounting, the residual value is an estimated amount that a company can acquire when they dispose of an asset at the end of its useful life.

What is the purpose of residual value?

Residual value is used to determine the monthly payment amount for a lease and the price the person holding the lease would have to pay to purchase the car at the end of the lease. The residual value of cars is often expressed as a percentage of the manufacturer’s suggested retail price (MSRP).

What’s the difference between lessee and lessor?

A lessor is essentially someone who grants a lease to someone else. As such, a lessor is the owner of an asset that is leased under an agreement to a lessee. The lessee makes a one-time payment or a series of periodic payments to the lessor in return for the use of the asset.