Question

Burns, Inc. (lessor) agreed to lease a delivery van to Wilmore Corp. (lessee). The lease was classified as a finance/sales-type lease, but the van will be turned back over to Burns at the end of six years.

Which of the following is true regarding the proper treatment of the delivery van’s estimated residual value?

Multiple Choice

• Estimated residual values are ignored by both parties when initially recording a lease.

• In calculating the required lease payments, Burns will consider the estimated residual value regardless of whether it is guaranteed or unguaranteed by Wilmore.

• In establishing the initial lease payable, Wilmore will include the present value of the full estimated residual value, but only if it is guaranteed.

• In a lease that includes selling profit, the lessor will add the present value of the estimated residual value to sales revenue in the initial entry.

Answer 1

Solution:

The following statement is true regrding Sale-Type Lease

In calculating the required lease payments, Burns will consider the estimated residual value regardless of whether it is guaranteed or unguaranteed by Wilmore.

Explanation: In determonong the lease payments the lessor will reduce the fair value of the asset by the present value of the residual value . The reduced fair value becmoes the basis for calculating the lease payments.

Hope this helps! In case of any clarifications, kindly use the comment box below