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Question
1. Five payments of $26,379.74 (a 9% implicit rate) due at the end each year.2. The fair value of the tractor is $100,000.
3. The lease is nonrenewable and the tractor reverts to Star at the end of the lease term.
4. The tractor has a six-year economic life.
5. Hatfield has an excellent credit rating.
6. Star offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer.
Which of the following statements pertaining to lease accounting is not correct?
A. The lessee will depreciate a leased asset either over the lease term or the leased asset's useful life dependent upon which of the required lease capitalization criteria is (are) met.
B. The lessee ignores a guaranteed salvage value when calculating depreciation expense associated with a capital lease.
C. The lessor's annual income will decrease over time regardless of whether the lease is a sales-type lease or a direct financing lease.
D. The gross profit recorded by the lessor is the same whether or not the residual value is guaranteed by the lessee.
Answer
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