Which statement about sales-type leases is true?

Which statement about sales-type leases is true?

• A. It involves transfer of ownership and profit to the lessor.
• B. It does not transfer ownership and does not provide profit to the lessor.
• C. It requires a bargain purchase option by the lessee.
• D. It is always shorter than a direct financing lease.

Answer: (A)

Sales-type leases are treated as a sale of the asset by the lessor to the lessee. Because the asset is sold, the lessor records revenue and the cost of the asset upfront, which creates gross profit at the lease’s inception. This reflects the transfer of control of the asset to the lessee and the profit being earned by the lessor from the sale, not just financing income. The other statements don’t fit because there is indeed profit recognized and the arrangement is not defined by a mandatory bargain purchase option or by a fixed rule about lease length relative to a direct financing lease.

Sales-type leases are treated as a sale of the asset by the lessor to the lessee. Because the asset is sold, the lessor records revenue and the cost of the asset upfront, which creates gross profit at the lease’s inception. This reflects the transfer of control of the asset to the lessee and the profit being earned by the lessor from the sale, not just financing income. The other statements don’t fit because there is indeed profit recognized and the arrangement is not defined by a mandatory bargain purchase option or by a fixed rule about lease length relative to a direct financing lease.