Marshall, Inc., leased equipment to Gadsby Company on January 1, 2011. The lease is for a five-year period ending January 1, 2016. The first equal annual payment of $1,200,000 was made on January 1, 2011. The cash selling price of the equipment is $5,174,552, which is equal to the present value of the lease payments at 8%. Marshall purchased the equipment for $4,300,000.
Marshall should account for this lease as

Question

Quizplus · Accepted Answer

This lease meets the criteria for a sale-type lease because the cash selling price ($5,174,552) is greater than the cost of the equipment ($4,300,000), and the lease term (5 years) is for a major part of the equipment's remaining economic life. Therefore, Marshall should recognize a gain on the sale of the equipment and amortize the gain over the lease term.