Celestion,Inc. ,leased equipment to Speaker Company on January 1,2014.The lease is for a five-year period ending January 1,2019.The first equal annual payment of $1,200,000 was made on January 1,2014.The cash selling price of the equipment is $5,174,552,which is equal to the present value of the lease payments at 8%.Celestion purchased the equipment for $4,300,000.
-Celestion should account for this lease as

Question

Quizplus · Accepted Answer

This lease should be accounted for as a sale-type lease because the cash selling price ($5,174,552) equals the present value of the lease payments and Celestion is earning a profit on the lease. Additionally, the lease term is longer than 75% of the estimated economic life of the equipment, which also indicates a sale-type lease classification.