Lessee Accounting for Residual Value
Whether the estimated residual value is guaranteed or unguaranteed has both economic and accounting consequence to the lessee. The accounting consequence is that the minimum lease payments, the basis for capitalization, include the guaranteed residual value but excludes the unguaranteed residual value.
Whether the estimated residual value is guaranteed or unguaranteed has both economic and accounting consequence to the lessee. The accounting consequence is that the minimum lease payments, the basis for capitalization, include the guaranteed residual value but excludes the unguaranteed residual value.
Guaranteed Residual Value (Lessee Accounting). A guaranteed residual value affects the lessee’s computation of minimum lease payments. Therefore it also affects the amounts capitalized as a leased asset and a lease obligation. In effect, the guaranteed residual value is an additional lease payment that the lessee will pay in property or cash, or both, at the end of the lease term.
Lessee records the leased asset (front-end loader) and liability, depreciation, interest,property tax, and lease payments on the basis of a guaranteed residual value.If the fair market value exceeds residual value, a gain may be recognized. When there is a guaranteed residual value, the lessee must be careful not to depreciate
the total cost of the asset.
the total cost of the asset.
Unguaranteed Residual Value (Lessee Accounting). From the lessee’s viewpoint, an unguaranteed residual value is the same as no residual value in terms of its effect upon the lessee’s method of computing the minimum lease payments and the capitalization of the leased asset and the lease liability.
Lessor Accounting for Residual Value
The lessor will recover the same net investment whether the residual value is guaranteed or unguaranteed. That is, the lessor works on the assumption that it will realize the residual value at the end of the lease term whether guaranteed or unguaranteed. The lease payments required in order for the company to earn a certain return on investment are the same whether the residual value is guaranteed or unguaranteed.