Question

Part 2: Sales-type leases and direct-financing leases are two of the classifications of leases described in FASB pronouncements from the standpoint of the lessor.

(c) Manufacturer’s or dealer’s profit.

Do not discuss the criteria for distinguishing between the leases described above and operating leases.

Short answer

In a direct-financing lease, there is no manufacturer’s or dealer’s profit.

Step-by-step solution

Step-by-Sep SolutionStep 1: Meaning of Sale-type lease

In a sales-type lease, the lessor is assumed to be selling a product to the lessee, which necessitates the reporting of a profit or loss on the sale. As a result, at the lease's start date, the following accounting is applied: (a) Recognize assets, (b)Recognize net investment.

Comparing and contrasting a sales-type lease with manufacturers or dealer profit.

The difference between the sales price and the carrying amount of the leased equipment is called manufacturer's or dealer's profit in a sales-type lease, and it is included in revenue in the period when the lease transaction is recorded.

There is no profit for the manufacturer or dealer in a direct-financing lease. The leasing transaction's income is entirely made up of interest.