Lessor Accounting for Operating Leases

Lesson: Lessor Accounting for Operating Leases

In this lesson, dive into the mechanics of how operating leases are accounted for from the perspective of the lessor, the party leasing out the asset. Nick Palazzolo, CPA, begins with a concise recap on financing leases before differentiating between the treatments of finance and operating leases. He intricately explains the criteria for an operating lease and outlines the accounting procedures a lessor must follow when this classification is determined. You'll learn about the implications of asset ownership on balance sheets, how revenue is recognized over time, and see real journal entry examples illustrating the depreciation of leased assets and the recording of other lease-related costs like insurance and maintenance. Accompany Nick as he breaks down the application of the double declining balance method and other key aspects of lessor accounting in a way that's simple to grasp and relevant for practical use.

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Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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The lessor accounting for operating leases. Okay, so let's recap what we've seen so far. We've seen the financing lease from the lessor's perspective, sorry, from the lessee's perspective, from your perspective when you're leasing it. And what did we just see here? We just saw operating leases.

So let's talk a little bit more about operating leases. Now, applying the same classification tests used by Sharper Bolton, classifies the lease as an operating lease, as none of the finance lease tests are met. So this is now from the lessor's perspective, the party leasing the asset to the other party under the operating method. So we're both using the operating method. Both parties are using the operating because none of the criteria were met.

If one of the criteria is met, then the lessee, the party leasing uses the finance method, the finance lease, and then the lessor will either use the sales type or the direct method. We'll see those later on. Generally, it can be the sales type, and that's just a classification of the finance lease. It's a further breakdown of it further classification. So under the operating method, the party leasing the asset to the other continues to recognize the asset on its balance sheet and recognizes lease revenue generally on a straight line basis in each period, depreciates the lease asset using double declining balance.

This is still owned by Bolton because it's an operating lease. If it was a finance lease, well, then Sharper essentially is the owner, and Sharper would deal with the depreciation.

All right, now, this is from, again, the lessor's perspective, different perspectives here. Still operating lease, but different perspectives. So from the perspective of the party leasing the asset to the other, this is how we recognize revenue. Now, this is as

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