Accounting for the Receivable in a Lease Transaction: A Dilemma.

Abstract This article focuses on accounting for the receivable in a lease transaction. In November 1972, the Accounting Principles Board issued Opinion Number 27 dealing with lease transactions by manufacturers or dealer lessors. Within this Opinion, no mention was made as to the valuation of the receivable for the periodic payments under the lease. It has been assumed that on January 1, 1975 a company leases a machine which costs 299, 060 for its full useful life of 5 years. The lease stipulates 5 yearly payments of 100, 000, due at the end of each year, which yields a 20 percent return. In the first method, the asset Due from Lessee is valued at the present discounted value of the rental payments; in the second method, the asset is valued at the total amount of the rental payments and a contra-asset Unearned Revenue-Lease is also used. While the results are similar, the balance sheet presentation differs. In favor of alternative 2 is the fact that such a receivable is valued similarly in Opinion 7 and that Opinion 27 seems to favor the recording of total estimated costs in a lease transaction; thus, the receivable should be valued in a similar method.