How does Big Apple Bagels calculate the present value of minimum lease payments?
Big_Apple_Bagels Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company leases restaurant equipment to a certain franchisee under a sales-type lease agreement. Under the terms of the agreement, title to the equipment passes to the customer once all lease payments have been made and a reasonable buy-out fee is paid. The Company retains title or a security interest in the equipment until such time. The sales and cost of sales are recognized at the inception of the lease. The profit or loss on the issuance of the lease is recorded in the period of commencement. The investment in sales-type leases consists of the sum of the minimum lease payments receivable less unearned interest income and, if applicable, estimated executory cost. Minimum lease payments are part of the lease agreement between the Company (as the lessor) and the franchisee (as the lessee). The discount rate implicit in the lease is used to calculate the present value of minimum lease payments. The minimum lease payments consist of the gross lease payments net of executory costs, if any. Unearned interest income is amortized to income over the lease term to produce a constant periodic rate of return on net investment in the lease. While revenue is recognized at the inception of the lease, the cash flow from the sales-type lease occurs over the course of the lease, which results in interest income and reduction of receivables.
Source: Item 23 — RECEIPTS (FDD pages 87–319)
What This Means (2025 FDD)
According to Big Apple Bagels' 2025 Franchise Disclosure Document, the present value of minimum lease payments is calculated using the discount rate implicit in the lease. This calculation is part of how Big Apple Bagels accounts for a sales-type lease agreement where they lease restaurant equipment to a franchisee.
Under this agreement, the franchisee gains ownership of the equipment after all lease payments and a buyout fee are made. Big Apple Bagels recognizes the sales and cost of sales at the beginning of the lease. The investment in these leases is the sum of the minimum lease payments receivable, minus any unearned interest income and estimated executory costs. The minimum lease payments are the total lease payments, minus executory costs, if any.
Unearned interest income is then amortized over the lease term to create a consistent rate of return on the net investment. While Big Apple Bagels recognizes revenue upfront, the actual cash flow occurs over the lease term, resulting in interest income and a reduction of receivables. This accounting practice affects how Big Apple Bagels reports its financial performance related to these specific lease agreements with franchisees.