Final answer:
The lessor, who is a manufacturer, records the lease transaction in their financial records.
Step-by-step explanation:
When a lessor (the entity leasing out an asset) is also the manufacturer of the leased asset, it has significant implications for the accounting treatment. In this context, the lessor will record the transaction using what is known as the sales-type lease accounting method. The sales-type lease accounting method is one of the three primary lease classification methods defined by accounting standards, and it is typically applied when the lessor is also the manufacturer of the leased asset.
Under the sales-type lease accounting method, the lessor recognizes both a sale and a lease at the inception of the lease. This means that the lessor not only transfers the right to use the asset (creating a lease) but also sells the asset to the lessee. This dual recognition reflects the economic substance of the transaction.
The lessor will follow specific steps to record the transaction:
Recognizing the Sale:
The lessor will recognize the sale of the asset on its books. The sales amount will generally be equal to the fair value of the asset. This creates a revenue entry for the lessor.
Recognizing the Lease:
Simultaneously, the lessor will recognize a lease liability on its balance sheet. This represents the obligation to provide the lessee with the right to use the asset over the lease term. The lessor will also recognize a receivable, representing the future lease payments from the lessee.
Allocating the Selling Price:
The selling price of the asset is then allocated between the sales and financing components. The financing component represents the interest income that the lessor will earn over the lease term.
Recognizing Interest Income:
The lessor will recognize interest income over the lease term, reflecting the financing aspect of the arrangement. This interest income is recorded over the period of the lease based on the interest rate implicit in the lease.
In summary, when a lessor is also the manufacturer of the leased asset, the sales-type lease accounting method is applied. This method reflects both the sale of the asset and the creation of a lease. The lessor records revenue from the sale and recognizes a lease liability and interest income over the lease term. This accounting treatment ensures that the lessor accurately reflects the economic substance of the transaction and complies with accounting standards such as those outlined in the International Financial Reporting Standards (IFRS) or the Generally Accepted Accounting Principles (GAAP)