Question
Neinus Co. leased a new electronic widget tester to Merrell for a period of 10 years. At the termination of the noncancelable lease, Merrell had
Neinus Co. leased a new electronic widget tester to Merrell for a period of 10 years. At the termination of the noncancelable lease, Merrell had the right to purchase the machine for 20% of its fair value at that time. Merrell is a financially stable company, and collectibility of the future lease payments is assured. The machine contains many technologically advanced components, and Neinus has guaranteed to repair any breakdown, no matter how minor, for the life of the lease plus an additional 10-year period. This unusual guarantee was offered by Neinus to gain experience with the new machine in an actual use situation. The cost of meeting the terms of this guarantee cannot be reasonably estimated. According to current authoritative literature, Neinus should account for this lease as
a) capital lease
b) direct financing lease
c) an operating lease
d) sales-type lease
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started