In short, residual value is the estimated fair value of the leased asset at the end of the lease, and can be either guaranteed or unguaranteed by the lessee. Guaranteed residual values are usually included in the minimum lease payments.

Both guaranteed and unguaranteed residual values affect accounting by the lessee and lessor. For the lessor the determination of the lease payments with a residual value is also different.

This post discusses residual value of leased asset and how it affects the accounting by both lessee and lessor. It comes with case examples, computation and the required journal entries. But before that, I would do a quick overview on some elements of a capital lease which is important to enable you to understand computation main topic. Read on…