Bohl Co. purchases land and constructs a service station and car wash for a total of $360,000. At January 2, 2007, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $400,000 and immediately leased from the oil company by Bohl. Fair value of the land at time of the sale was $40,000. The lease is a 10-year, noncancelable lease. Bohl uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Bohl at termination of the lease. A partial amortization schedule for this lease is as follows:

-From the viewpoint of the lessor, what type of lease is involved above?
A) Sales-type lease
B) Operating lease
C) Direct-financing lease
D) None of these

Question

Bohl Co. purchases land and constructs a service station and car wash for a total of $360,000. At January 2, 2007, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $400,000 and immediately leased from the oil company by Bohl. Fair value of the land at time of the sale was $40,000. The lease is a 10-year, noncancelable lease. Bohl uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Bohl at termination of the lease. A partial amortization schedule for this lease is as follows:
 
-From the viewpoint of the lessor, what type of lease is involved above?
A) Sales-type lease 
B) Operating lease 
C) Direct-financing lease 
D) None of these

Quizplus · Accepted Answer

A direct-financing lease is indicated from the lessor's viewpoint when the lessor is essentially acting as a financier, purchasing an asset for lease without planning to be involved in its use. This type of lease is characterized by the lessor not being the manufacturer or dealer of the leased asset, with the profit or loss being recognized through the interest income over the lease term rather than at the point of sale.

Bohl Co Purchases Land and Constructs a Service Station and Car