Question

21. A noncancelable lease contains an option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably certain. The fair value of the asset exceeds the lessor's cost of the asset. Therefore, the lease will be accounted for by the lessor as a(n):

Answer 1

Answer: A. Sales-type lease

Explanation:

A Sales type lease is one where the present value of all the lease payments of the Asset being leased is more than the cost/ carrying amount of the Asset.

The present value of the lease Payments is the Fair Value of the asset and as seen from the question, the fair value of the asset is more than the cost of the Asset. The lease will therefore be accounted for as a Sales type lease by the lessor.

It is worthy of note that this entry affects only the lessor.