What Is a Minimum Payment?

The minimum lease payment refers to the amount (excluding contingent rent and performance costs) that the lessee should pay or may be required to pay during the lease period, plus the residual value of the asset guaranteed by the lessee or a third party associated with it.

Minimum lease payment

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The composition of the minimum lease payment can be analyzed in the following two situations:

1. If the lease contract does not specify a preferential purchase option, the amounts that the lessee should pay or may be required to pay during the lease term include:

The rent paid by the lessee in each period during the lease period;

At the end of the lease period, the residual value of the assets guaranteed by the lessee or a third party related to it;

When the lease term expires, any amount due by the lessee that fails to renew or extend the lease should be paid by the lessee.

2. If the lease contract stipulates a preferential purchase option, the amount that the lessee should pay or may be required to pay during the lease period includes: from the lease start date to the date when the preferential purchase option is exercised, that is, the entire lease period Rent per period; any payment made in the exercise of a preferential purchase option.

Accounting entry processing of minimum lease payments in finance lease payables

At the start of the lease period, the lessee's accounting entry is

Borrow: Fixed assets (or construction in progress) (the lower of the fair value of the leased asset and the present value of the minimum lease payment + the initial direct cost)

Unrecognized financing costs

Loans: long-term payables (minimum lease payments)

Bank savings