Finance Lease-LesseeFinance LeaseIn substance, a purchase of property by the lessee from the lessorActually a lease purchaseA capital lease (under USA GAAP)Finance LeaseFinance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset.hether a lease is a !nance lease is a !nance lease or an operatin" lease depends on the substance of the transactionrather than the form of the contractLessees part Lessors part#urchase of asset $ransfer of property%eco"ni&e asset %eco"ni&e recei'able%eco"ni&e lease liability %e'enuehen is a lease a Finance Lease($ransfer of ownership of the leased asset at the end of the leased term)ption to purchase the asset at price lower than Fair *alue (+ar"ain #urchase )ption)$he lease terms is for themajor part of the economic life of the asset e'en if the title is not transferred,a-or part. /01 (23A 4AA#)#* ofthe ,inimum Lease #ayment amount to substantially all of the F* of the leased asset 5 the inception of the lease.3ubstantially all. 671 (23A 4AA#))ther 8riteriaLeased asset is of such speciali&ed in nature that only the lessee can use it without major modifcation.Lessee can cancel the lease but bear all the lessor9s losses4ain or losses from the :uctuation in the fair 'alue of the residual accrue to the lessee$he lessee has the ability to continue the lease for secondary at a rent that is substantially lower than mar;et rent3ale and Leasebac;3ale and Leasebac;A sale and leaseback is an arran"ement wherebyone party sells a property to another party and then immediately leases that property bac; from its owner.3eller#urchaserlessee lessorLeases it bac;3ells the asset3ale and Leasebac;%easons for sale and leasebac;.$he seller-lessee may e,777,777 which is eAual to the fair 'alue of the machinery. $he entityimmediately leased the machinery bac; for B years at the pre'ailin" annual rent of #=77,777.$he machinery has a carryin" amount of #=,C77,777, net of accumulated depreciation of #=,>77,777.Books of seller-lessee=. $o record the sale8ash>,777,777Accumulated Dep9n=,>77,777,achinery?,777,7774ain on sale and leasebac;>77,777>. $o record annual rent%ent e,777,7778ash >,777,777>. $o record the annual rent8ash=77,777%ent income=77,777?. $o record the depreciation of the machineryDepreciation>77,777Accumulated Depreciation>77,777Leasebac; as a !nance leaseAny gain on sale and leasebac; isdeferred and amortized o'er the lease term.Any loss on sale and leasebac; isrecognized immediatelyIllustration- Leasebac; as a !nance lease)n Eanuary =, >7=B an entity sold an eAuipmentwith a remainin" life of =0 years. At the same time, the entityleased bac; the eAuipment for =7 years.8ost of eAuipmentAccumulated Depreciation3ale price (eAuals to #* of rentals)Annual rental payable at year endInterest rate implicit in the lease#*)A of = 5 =>1, =7 periodsAssume that this is a fnance lease because of P! and it"s reasonably certain that it would be e#ercise at the end of the lease term.0,777,777=,>07,777B,0>7,777C77,777=>10.F0+oo;s of seller lesseeTo record the sale8ashB,0>7,777Accumulated Dep =,>07,777GAuipment 0,777,777Deferred "ain on sHlb //7,777To record the leaseback as fnance leaseGAuipment B,0>7,777Lease Liability (C77; < 0.F0) B,0>7,777To record the frst rental paymentInterest G1 < B,0>7,777) 0B>,B77Lease Liability>0/,F77To record the depreciationIDepreciation ?7=,???Acc.Dep ?7=.???IB,0>7,777 J =0+ased on the remainin" useful lifeTo amortize the deferred gain as earned over the lease term of ! yearsDeferred "ain //,7774ain on sHlb //,777(//7,777J=7)+oo;s of purchaser-lessorTo record the purchaseGAuipment B,0>7,7778ash B,0>7,777To record the lease as a fnance leaseLease %ecei'able (C77,777) C,777,777GAuipment B,0>7,7772nearned interest income ?,BC7,777To record the frst rental payment8ash C77,777Lease %ecei'ableC77,777To record the interest income for the frst year2nearned interest income0B>,B77Interest Income0B>,B77