Use the following information for questions 94 through 98.
Gage Co. purchases land and constructs a service station and car wash for a total of $360,000. At January 2, 2014, 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 Gage. Fair value of the land at time of the sale was $40,000. The lease is a 10-year, noncancelable lease. Gage 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 Gage 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) Sale-leaseback
C) Direct-financing lease
D) Operating lease

Question

Use the following information for questions 94 through 98.
Gage Co. purchases land and constructs a service station and car wash for a total of $360,000. At January 2, 2014, 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 Gage. Fair value of the land at time of the sale was $40,000. The lease is a 10-year, noncancelable lease. Gage 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 Gage 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) Sale-leaseback 
C) Direct-financing lease 
D) Operating lease

Quizplus · Accepted Answer

The question implies a scenario involving a lease from the perspective of the lessor but does not provide specific details about the lease characteristics. However, given the options, a direct-financing lease is a type of lease from the lessor's viewpoint that does not involve selling the leased asset (which would be a sales-type lease), is not a sale and subsequent leaseback of the asset by the lessor (sale-leaseback), and is not an operating lease, which typically involves shorter-term leases where the lessor retains significant risks and benefits of ownership. A direct-financing lease typically occurs when the lessor's primary interest is in the financing aspect, rather than the use of the asset, and recognizes interest income over the lease term.

Use the Following Information for Questions 94 Through 98