Final answer:
The primary difference between a direct-financing lease and a sales-type lease is the recognition of profit on the sale; a direct-financing lease recognizes profit over time as interest revenue, while a sales-type lease recognizes immediate profit at lease inception.
Step-by-step explanation:
The basic difference between a direct-financing lease and a sales-type lease is the recognition of profit on the sale. In a direct-financing lease, the lessor does not recognize any immediate profit from the lease transaction itself; instead, the profit is realized in the form of interest revenue over the lease term.
In contrast, a sales-type lease involves the lessor recording an immediate profit at the inception of the lease, which represents the difference between the fair value of the leased asset and its carrying amount.
In terms of the amount of depreciation recorded each year by the lessor, this can vary in both leases but does not fundamentally distinguish one from the other. Similarly, the allocation of initial direct costs by the lessor is not a key differentiator between these two types of leases.
Lastly, the manner in which rental receipts are recorded does not generally differ significantly between direct-financing and sales-type leases as both result in rental income for the lessor over the lease term.