Lessor Co. enters a sales-type lease. The equipment cost $60,000 and the fair value is $75,000. The present value of the lease payments is $75,000. What is the immediate effect on the Lessor's income statement?

Answer options:

No immediate profit; recognize interest over time.

Recognize $15,000 gross profit immediately.

Recognize $75,000 revenue immediately, no COGS.

Defer the profit and amortize over lease term.

How to approach this question

Identify Lease Type. FV > Cost = Sales-Type with Profit. Treatment: Recognize Profit (FV - Cost) immediately.

Full Answer

B.Recognize $15,000 gross profit immediately.✓ Correct

In a sales-type lease where Fair Value exceeds Carrying Value (Cost), the lessor recognizes the selling profit ($75,000 - $60,000 = $15,000) immediately at the commencement date.

Common mistakes

Confusing Sales-Type with Direct Financing (where profit is deferred/amortized).

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