| Course | ACC-6010 Intermediate Accounting III |
|---|---|
| Module | Module 5 |
| Paper type | Written Assignment 5: accounting for leases |
| Length | About 703 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | M.S. in Management in Accounting |
| Updated | October 2026 |
Free sample paper for ACC 6010 Module 5
Palisades Optical Corp. on Both Sides of a Lease: Selling Profit as Lessor and a Guaranteed Residual as Lessee
Student Name
M.S. in Management in Accounting, Thomas Edison State University
ACC-6010: Intermediate Accounting III
Mentor Name
Month Day, Year
Palisades Optical Corp. on Both Sides of a Lease: Selling Profit as Lessor and a Guaranteed Residual as Lessee
Introduction
The current U.S. lease standard puts nearly all leases on the lessee's balance sheet but keeps two lessee models, finance and operating, while IFRS 16 uses one. Lessor accounting changed less: lessors still classify leases as sales-type, direct financing or operating. Kieso et al. (2012), written before both standards took effect, describe the older rules, so the problems below follow the current standards (Financial Accounting Standards Board [FASB], 2016).
Problem 1: Palisades as Lessor
A camera maker took a coating machine from Palisades on January 1, 2026, for four years at $250,000 a year, paid in advance each January. The machine, carried in inventory at $800,000, has a five-year economic life and no expected residual value. The rate implicit in the lease is 6%, which makes the present value of the payments $250,000 x 3.67301 = $918,253, the machine's fair value.
Four of the machine's five years go to the camera maker, and the payments' present value nearly equals what the machine is worth, so Palisades reports a sales-type lease.
Palisades recognizes selling profit of $118,253 at commencement, just as if it had sold the machine. The receivable after the first payment is $668,253, and interest revenue for 2026 is $668,253 x 6% = $40,095, accrued at year end.
| Entry on January 1, 2026 | Debit | Credit | |
|---|---|---|---|
| Lease receivable | 918,253 | None | |
| Cost of goods sold | 800,000 | None | |
| Sales revenue | None | 918,253 | |
| Inventory | None | 800,000 | |
| First payment received | Cash 250,000 | Lease receivable 250,000 | |
| Year | Payment on January 1 | Interest at 6% during the year | Receivable at year end |
| 2026 | $250,000 | $40,095 | $708,348 |
| 2027 | 250,000 | 27,501 | 485,849 |
Problem 2: Palisades as Lessee
On the same date, Palisades leased a delivery truck for three years, paying $18,000 at the end of each year. Palisades guarantees that the truck will be worth $10,000 at the end of the lease and expects to owe $2,000 under the guarantee, because the truck will probably be worth $8,000. Its incremental borrowing rate is 7%. Only the amount probable of being owed under a residual guarantee enters the lease payments.
The truck has an eight-year life and a fair value of $60,000. Three years is well short of most of an eight-year life, and $48,871 covers roughly 81% of fair value, under the "substantially all" mark, so the lease fails every finance test. Palisades reports an operating lease with a straight-line cost of ($18,000 x 3 + $2,000) / 3 = $18,667 a year. Interest on the liability comes to $3,421 for 2026, and the asset is written down by the $15,246 gap between the even yearly cost and that interest.
| Lease liability at commencement | Factor at 7% | Present value |
|---|---|---|
| Three annual payments of $18,000 | 2.62432 | $47,238 |
| Expected guarantee payment of $2,000 in three years | 0.81630 | 1,633 |
| Lease liability and right-of-use asset | | $48,871 |
IFRS Application
IFRS 16 has a single model for lessees: every lease except short-term and low-value leases is accounted for like a financed purchase. Palisades would depreciate the right-of-use asset and charge interest on the liability separately.
IFRS 16 front-loads the cost and moves it below operating expense into finance cost, which raises operating profit measures such as EBITDA. Lessor accounting under IFRS 16 is similar to U.S. GAAP, though IFRS uses finance and operating categories and does not separate sales-type from direct financing leases. Barth et al. (2008) found that firms adopting international standards showed signs of higher accounting quality, but lease comparisons show that differences in measurement can still change headline ratios between U.S. and IFRS reporters.
IFRS 16 also offers an exemption U.S. GAAP does not: lessees may expense leases of low-value assets, which the IASB suggested means items worth about $5,000 or less when new, such as laptops. Both frameworks let lessees expense leases of 12 months or less. For Palisades, neither exemption applies to the delivery truck, so the comparison of expense patterns stands.
| Truck lease cost | U.S. GAAP operating lease | IFRS 16 |
|---|---|---|
| 2026 | $18,667 single lease cost | Depreciation $16,290 + interest $3,421 = $19,711 |
| 2027 | 18,667 | 16,290 + interest about $2,400 = 18,690 |
| 2028 | 18,667 | 16,290 + interest about $1,300 = 17,590 |
References
Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International accounting standards and accounting quality. Journal of Accounting Research, 46(3), 467-498. https://doi.org/10.1111/j.1475-679X.2008.00287.x
Financial Accounting Standards Board. (2016). Leases (Topic 842) (Accounting Standards Update No. 2016-02).
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2012). Intermediate accounting (14th ed.). John Wiley & Sons.
What the ACC 6010 Module 5 instructions ask for
Written Assignment 5 covers Module 5, accounting for leases, and is one of nine ACC-6010 written assignments that together count 60 percent of the grade. Its last question asks how IFRS 16 would treat the same lessee. Because Kieso's 14th edition predates the current lease standards, the course materials may add the newer rules; your problems may follow either, so check the instructions. The prompts cover how a lessee classifies and measures a lease, the lessor's sales-type, direct financing and operating cases, guaranteed residuals, purchase options and where U.S. GAAP and IFRS 16 part ways. The facts below are composite; they follow the current standards and continue the invented company used in earlier assignments. Expect at least one lease to require a judgment about classification.
Inside the ACC 6010 Module 5 example
The introduction explains how the two frameworks diverge on lessee models and notes the textbook's age. Problem 1 measures the lessor's receivable, classifies the lease, records commencement with selling profit and shows a two-year interest schedule. Problem 2 measures the lessee's liability, including only the probable amount under the residual guarantee, tests the classification criteria with numbers and computes the straight-line cost and the asset reduction. The IFRS application recomputes the truck lease under the single lessee model, compares three years of cost in a table and explains the effect on operating profit, with a note on lessor accounting under IFRS.
ACC 6010 Module 5 rubric: what earns full marks
Lease answers count within the 60 percent of the grade reserved for written work. On a lease assignment, mentors look for correct classification with reasons, present values computed with the right factors and timing, selling profit recognized only in a sales-type lease, residual guarantees measured at the amount probable of being owed and a level cost for lessee operating leases. IFRS answers should apply the single lessee model and identify its effect on profit measures. Showing factors, schedules and entries completely makes partial credit possible when one input is wrong. Lessor and lessee schedules that show the interest and principal in each payment, and an explanation of the classification tests applied, complete a strong answer. Showing how the lessee's expense pattern would differ under IFRS 16 completes the comparison.
ACC 6010 Module 5 help from the desk
Lease problems usually go wrong on timing and on residual values. Payments made each January call for the annuity-in-advance factor. A lessee includes only the amount it expects to pay under a residual guarantee, while a lessor includes the full guaranteed residual. Test every classification criterion with numbers, not impressions. Under IFRS 16, there is no operating lease for lessees except short-term and low-value exemptions. If your textbook edition uses the older rules, follow your instructions. The desk will work a first sample of your own lease set free.
Write yours, or have the desk draft it
This paper is an original model document written by our desk, not a submitted student paper and not an official Thomas Edison State University document. Read it for the moves, then write your own to the instructions in your classroom. If you want one built to your exact prompt and rubric, the first custom sample is free and arrives in 24 to 48 hours.
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ACC 6010 Module 5 questions, answered
Where can I find a free ACC 6010 Module 5 sample paper?
Palisades Optical's lease assignment appears above: a lessor's sales-type lease with selling profit, a lessee's operating lease with a residual guarantee and an IFRS 16 comparison.
What is a sales-type lease?
A lessor's lease that meets a finance lease criterion, so the lessor derecognizes the asset, records a lease receivable and recognizes any selling profit at commencement.
How does a lessee treat a residual value guarantee?
It includes in lease payments only the amount it expects to owe under the guarantee, not the full guaranteed amount.
Does IFRS 16 have operating leases for lessees?
No. Lessees account for nearly all leases with a right-of-use asset that is depreciated and a liability that accrues interest, apart from short-term and low-value exemptions.
Why does IFRS 16 raise EBITDA?
Lease cost is split into depreciation and interest, both excluded from EBITDA, whereas an operating lease cost under U.S. GAAP is an operating expense.