Capital lease accounting by lessor

2. Sales-type lease

If, in the previous example, the carrying value of the machine in XYZ’s records is $55,000, the company has realized an immediate gain of $12,100 ($67,100-$55,000) because the fair value of the machine is greater than its book value. For a sales-type lease, the initial journal entry has two parts instead of just one.

Account Names




Lease receivable



       Unearned interest revenue



       Sales revenue




Cost of goods sold






Notice that, for sales-type leases, the first credit is to sales revenue. The income statement effect of these two entries is a $67,100 revenue and a $55,000 expense, for a total income of $12,100. Entries for subsequent lease payments are the same under both types of leases.

Now that we’ve covered standard capital leases from the perspective of both the lessee and the lessor, we will turn to a special type of lease called a sale-leaseback in the final article of this series.

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