Question

Question: Identify the lease classifications for lessors and the criteria that must be met for each classification.

Short answer

Answer

The lease may be classified as an operating lease, direct financing lease, and sale type lease.

Step-by-step solution

Meaning of Lessor

A lessor is the owner of the asset who involves in a lawful bilateral agreement with the lessee to transfer the rights to use the assets for a specific time and money. If the asset is sold, the lessor must approve the sale and is entitled to any financial profits made as a consequence of the sale.

Explaining the lease classifications for lessors and the criteria that must be met for each classification

For accounting reasons, leases can be categorized as (a) operational leases, (b) direct-financing leases, or (c) sales-type leases from the perspective of the lessor.

Finance leases are defined as those that match one or more of the following four criteria:

1. The lessee receives ownership of the property as a result of the lease.
2. There is a bargain-purchase option in the lease.
3. The lease period covers the majority of the asset's economic life, and 4. The present value of the minimum lease payments equals almost all of the leased asset's fair value.

Direct-financing leases and sales-type leases are two types of finance leases. Operating leases cover all other types of leases. The existence or absence of a manufacturer's or dealer's profit or loss is the difference between a direct-financing lease and a sales-type lease for the lessor.