A periodic payment made by the lessee to the lessor during the lease term for use of the leased asset, usually monthly or quarterly, is a lease payment. The periodic payment made on a finance lease is a minimum lease payment (MLP), which is the minimum amount that the lessor must receive over the lease term in order to recover all its costs associated with the leased asset and to earn a reasonable profit on its investment. MLPs comprise:
- The contractual rental payments specified in the lease;
- Any guaranteed residual value;
- Any penalty for failure to renew the lease; and
- Any bargain purchase option.
MLP = Rentals + Residual Value Guarantee + Renewal Penalty + Bargain Purchase Option
Executory costs are excluded from the calculation of the minimum lease payment if the rental includes such operational costs as insurance, maintenance and taxes.
The terms “rent”, “rental” and “rental payment” are commonly used alternatively for lease payment both in finance and operating leasing. A very low or nominal rent paid during a lease’s secondary period is a peppercorn rent.
| Lessee Recognition of Lease Payment | ||||
|---|---|---|---|---|
| Date | Interest Expense | xxxx | ||
| Lease Obligation | xxxx | |||
| Cash | xxxx | |||
| To record the payment of interest and principal amounts | ||||