What is Unguaranteed residual value?
In short
Unguaranteed residual value is the part of a leased asset's expected value at the end of the lease that the lessor expects to recover but that isn't guaranteed by the lessee or a third party.
Key takeaways
- In a sales-type lease, the lessor's net investment is the lease receivable plus the present value of the unguaranteed residual.
- Revenue and cost of goods sold both exclude the present value of the unguaranteed residual, so profit is unaffected.
- A guaranteed residual is included in the lease receivable instead.
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?