Which of the following statements regarding leasing is incorrect? A) Only a dealer or seller of the leased equipment may record a lease as a sales-type lease, and only non-dealers or non-sellers may record a lease as a direct-financing lease. B) A sales-type lease is a capital lease and a direct-financing lease is an operating lease. C) With a sales-type lease, gross profit is recognized at lease inception, but with a direct-financing lease, no gross profit is recognized at lease inception. D) With a sales-type lease, total assets increase at inception but with a direct-financing lease, total assets are unchanged at inception. What would you choose between B and D… and why…
I would say the answer to this one is B, as both sales-type and direct financing leases are types of capital leases for the lessor. For the lessor, a lease is classified as capital lease if the lease complies with at least one of the following: 1. S, from Seventy five percent (75%) of the asset’s economic life is leased 2. N, from Ninety percent (90%) of the PV of minimum lease payments 3. O, from Ownership transfer at the end of the lease 4. B, from Bargain purchase option And both of the following: 5. Collectibility of the minimum lease payments is reasonably predictable 6. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor Both sales-type and direct financing type of leases are capital leases for the lessor, the difference being that: For Sales-type Leases, meeting one or more of the 4 capital lease criteria and both sales-type and direct financing lease criteria, the lease gives manufacturer’s or dealer’s profit (or loss) to the lessor (the fair value of the asset is not equal with the book value of the asset for the lessor) OR For Direct Financing Lease, meeting one or more of the 4 capital lease criteria, and both sales-type and direct financing lease criteria but do not give manufacturer’s or dealer’s profit (or loss) to the lessor (the fair value of the asset is equal with the book value of the asset for the lessor).
Got it… Thanks…