Question

Blue Manufacturing produces lathes at an inventory cost of $25,000 each that sell for $32,000 each. For credit-approved customers, Blue leases the lathes for $8,500 per year for five years. The lathes are guaranteed to last four years and generally have a six-year life. Collection is predictable and reasonably assured. Additionally, the lessor is aware of all costs to be incurred under the lease that will not be reimbursed by the lessor.
Blue Manufacturing treats a lathe lease as a/an:

a. Direct-financing lease.
b. Operating lease.
c. Ordinary capital lease.
d. Sales-type lease.

Answer 1

Answer:

The correct option is A, direct finance lease

Explanation:

The lease is a direct finance lease because the lease period is a substantial part of the asset's  useful life.

Also, the cost of maintaining the asset is borne by the lessee, hence, the risk and reward of ownership have been transferred to the lessee.

In this case, the lessee would record the present value of the lease payments as right of use asset