What is Unearned Income?

• A. The present value of the lease payments
• B. The depreciation on the asset
• C. The unguaranteed residual value
• D. The gross investment minus asset cost

Answer: (D)

Unearned income is the portion of the lease investment that has not yet been earned as finance income. It’s defined as the gross investment in the lease minus the asset cost. At the start of the lease, the gross investment (which includes minimum lease payments and any unguaranteed residual value) exceeds the asset’s cost by this unearned amount. As lease payments are received, that unearned income is gradually recognized as finance income, while the asset’s cost portion is recovered.

This makes the other options less fitting: the present value of the lease payments relates to the overall investment, not specifically to unearned income; depreciation on the asset is a separate accounting concept; and the unguaranteed residual value is part of gross investment, not the portion labeled unearned income.