What is Guaranteed residual value?
In short
A guaranteed residual value is an amount the lessee or a third party promises the leased asset will be worth at the end of the lease, making up any shortfall.
Key takeaways
- A lessee includes in lease payments only the amount it is probable of owing under the guarantee.
- A lessor includes the full guarantee, from the lessee or a third party, in its lease receivable.
- Guarantees affect lease classification through the present value test.
Where it's tested
BAR: Lease Accounting — Lessor Perspective — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A lessor enters a sales-type lease with five annual payments of $20,000, the first due at commencement. The rate in the lease is 8%, and the asset has an unguaranteed residual value of $10,000. The present value of an annuity due (5 periods, 8%) is 4.3121 and the present value of 1 (5 periods, 8%) is 0.6806. What is the net investment in the lease?