Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2018. The manufacturing cost of the computers was $12 million.

This noncancelable lease had the following terms:

• Lease payments: $2,466,754 semiannually; first payment at January 1, 2018;
remaining payments at June 30 and December 31 each year through June 30, 2022.
• Lease term: five years (10 semiannual payments).
• No residual value; no purchase option.
• Economic life of equipment: five years.
• Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually.
• Fair value of the computers at January 1, 2018: $20 million.

-Technoid would account for this as:
A) A finance lease.
B) A sales-type lease without selling profit.
C) A sales-type lease with selling profit.
D) An operating lease.

Question

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2018. The manufacturing cost of the computers was $12 million.

This noncancelable lease had the following terms:

•	Lease payments: $2,466,754 semiannually; first payment at January 1, 2018; 
		remaining payments at June 30 and December 31 each year through June 30, 2022. 
	•	Lease term: five years (10 semiannual payments). 
	•	No residual value; no purchase option. 
	•	Economic life of equipment: five years. 
	•	Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. 
	•	Fair value of the computers at January 1, 2018: $20 million.

-Technoid would account for this as:
A) A finance lease.
B) A sales-type lease without selling profit.
C) A sales-type lease with selling profit.
D) An operating lease.

Quizplus · Accepted Answer

A sales-type lease is one in which the lessor earns a selling profit in addition to the interest income. In this scenario, the lessor is selling the equipment to the lessee and financing the sale through the lease, thus earning both interest income and a selling profit.