Question

The primary difference between a direct financing lease and a sales-type lease is the

a. manner in which rental receipts are recorded as rental income
b. amount of the depreciation recorded each year by the lessor
c. recognition of the manufacturer's or dealer's profit at the inception of the lease
d. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements

Answer 1

A direct financing lease and a sales-type lease differ in how the manufacturer's or dealer's profit is recognized at the inception of the lease.

Step-by-step explanation:

A direct financing lease and a sales-type lease are both types of leases that companies can use to acquire assets. The primary difference between these two types of leases is the recognition of the manufacturer's or dealer's profit at the inception of the lease. In a direct financing lease, the profit is not recognized upfront, while in a sales-type lease, the profit is recognized.

For example, let's say a company leases a piece of machinery from a dealer. In a direct financing lease, the dealer does not recognize the profit from the sale of the machinery upfront, but instead recognizes it over the lease term. In a sales-type lease, the dealer recognizes the profit from the sale of the machinery upfront when the lease agreement is signed.

This difference in profit recognition affects how rental receipts are recorded as rental income, as well as the allocation of initial direct costs by the lessor to periods benefited by the lease arrangements. Therefore, the correct answer is option (c) recognition of the manufacturer's or dealer's profit at the inception of the lease.