Jackson Corporation leases equipment to Andrews Company for a five year period.At the beginning of the lease,Jackson records sales revenue.The lease to Andrews must ________.
A)be a sales type lease
B)be a direct financing lease
C)have a bargain renewal option
D)be an operating lease

Question

Quizplus · Accepted Answer

Sales type leases are used when the lease transfers ownership of the asset to the lessee at the end of the lease term, and the lessor can recognize profit on the sale at the beginning of the lease term. Since Jackson records sales revenue at the beginning of the lease, it indicates that the lease is a sales type lease. Direct financing leases transfer substantially all the risks and rewards of ownership to the lessee and do not allow for recognition of profit at the beginning of the lease. Bargain renewal option and operating lease are not relevant to the determination of the lease classification in this scenario.

Jackson Corporation Leases Equipment to Andrews Company for a Five