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Answer :
Blue Manufacturing should categorize the lathe lease as a option(A)Direct-financing lease, due to predictable collections and knowledge of unreimbursed costs by the lessor, without transfer of ownership and with a life of the asset exceeding the lease term.
Based on the information provided, Blue Manufacturing should treat the lathe lease as a Direct-financing lease. Since collection is predictable and reasonably assured, and the lessor is aware of all costs to be incurred under the lease that will not be reimbursed by the lessor, it meets some criteria of direct-financing leases. This type of lease is characterized by the lessor's ability to realize the fair value of the leased asset and earn a profit through finance charges, without being involved in the actual use of the asset.
The key distinctions among lease treatments, such as whether it is an operating lease, capital lease, or sales-type lease, generally pertain to factors such as transfer of ownership, the present value of lease payments, and the economic life of the asset. Given that the lessee does not gain ownership after lease term and the asset's life exceeds the lease term, yet the collectability of payments is reasonably assured, Blue Manufacturing's lease agreement aligns with a direct-financing lease.
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Answer:
The correct option is A, direct finance lease
Explanation:
The lease is a direct finance lease because the lease period is a substantial part of the asset's useful life.
Also, the cost of maintaining the asset is borne by the lessee, hence, the risk and reward of ownership have been transferred to the lessee.
In this case, the lessee would record the present value of the lease payments as right of use asset
