Interboro Hospital generated net patient revenues of $125 million for 20X1, and its cash collections…

The lessor’s gross and net investment in the lease

The lease has the same facts as described in, i.e. the asset has a fair value of €10,000, the lessee is making five annual rentals payable in advance of €2,100 and the total unguaranteed estimated residual value at the end of five years is estimated to be €1,000. The lessor’s direct costs have been excluded for simplicity.

The lessor’s gross investment in the lease is the total rents receivable of €10,500 and the unguaranteed residual value of €1,000. The gross earnings are therefore €1,500. The initial carrying value of the receivable is its fair value of €10,000, which is also the present value of the gross investment discounted at the interest rate implicit in the lease of 6.62%.

Year

`Receivable
at start of
period

Rental
received

Finance
income
(6.62% per
annum)

Gross
investment
at end of
period

Gross
earnings
allocated to
future periods

Receivable
at end of
period

1

10,000

2,100

523

9,400

977

8,423

2

8,423

2,100

419

7,300

558

6,742

3

6,742

2,100

307

5,200

251

4,949

4

4,949

2,100

189

3,100

62

3,038

5

3,038

2,100

62

1,000

1,000

10,500

1,500

The gross investment in the lease at any point in time comprises the aggregate of the rentals receivable in future periods and the unguaranteed residual value, e.g. at the end of year 2,, the gross investment of €7,300 is three years’ rental of €2,100 plus the unguaranteed residual of €1,000. The net investment, which is the amount at which the debtor will be recorded in the balance sheet, is €7,300 less the earnings allocated to future periods of €558 = €6,742.

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