ExpertMedium1 markMultiple Choice
CPA · Question 38 · Area II: Technical Accounting
Lessor Corp leases a machine to Lessee Inc. for 4 years. The machine has a 5-year economic life. The present value of the lease payments is $95,000, and the fair value of the machine is $100,000. Lessor Corp is reasonably certain to collect the payments. There is no transfer of ownership or purchase option. <br/><br/>How should Lessor Corp classify this lease?
Lessor Corp leases a machine to Lessee Inc. for 4 years. The machine has a 5-year economic life. The present value of the lease payments is $95,000, and the fair value of the machine is $100,000. Lessor Corp is reasonably certain to collect the payments. There is no transfer of ownership or purchase option. <br/><br/>How should Lessor Corp classify this lease?
Answer options:
A.
Sales-Type Lease
B.
Direct Financing Lease
C.
Operating Lease
D.
Leveraged Lease
How to approach this question
Check the 5 criteria (OWNES): Ownership, Written option, Net present value (90%), Economic life (75%), Specialized asset. If ANY are met -> Sales-Type.
Full Answer
A.Sales-Type Lease✓ Correct
The lease meets the 'Major Part of Economic Life' criterion (4/5 = 80% > 75%) and the 'Substantially All Fair Value' criterion ($95k/$100k = 95% > 90%). Therefore, it is a Sales-Type Lease.
Common mistakes
Thinking it must transfer ownership to be Sales-Type.
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