Question

Knowledge Check 01
On January 1, Leveler Corporation leased equipment to Messy Company. The present value of the lease payments is $200,000 and Leveler’s cost of the equipment was $125,000. The lease is properly classified as a sales-type lease. In comparison to the entries that would have been made if this lease did not include a selling profit, how are the entries affected because this lease includes a selling profit? (Select all that apply.)

Required information Check All That Apply 12.5 points The entries made by Leveler are not affected. 1 Print The entries made by Messy are not affected. References The entry made by Leveler to record the receipt of the first lease payment also will include the sales revenue and cost of goods sold. The entry made by Messer to record the payment of the first lease payment also will include the sales revenue and cost of goods sold. Each of the entries made by Leveler over the term of the lease will include a portion of the sales revenue and cost of goods sold. 1. Each of the entries made by Messy over the term of the lease will include a portion of the sales revenue and cost of goods sold.

Answer 1

Solution:

-- The entries made by Messy are not affected.

-- The entry made by Leveler to record the receipt of the first lease payment also will include the sales revenue and cost of goods sold

Explanation: If there is a profit on selling, all lessor entries except the entry at the beginning of the lease would be considering the selling profit, and are precisely the same as the entries for a sales-type lease excluding the selling profit. Also entries made by the lessee remain unaffected.