On January 1, Year One, Owens buys a large warehouse for $700,000 which it immediately sells to National Financing for $800,000. The warehouse has an expected life of 10 years. Owens immediately signs a contract to lease the warehouse back for its own use. This lease is for 10 years with payments of $120,000 per year. The first payment is made immediately. Assume that these payments were computed using a 10 percent annual interest rate. Which of the following statements is true? a. The $100,000 gain on the original sale must be recognized by Owens immediately. b. The $100,000 gain on the original sale will be recorded by Owens as other comprehensive income. c. The $100,000 gain on the original sale will be deferred until the end of the lease and then recognized as a gain. d. The $100,000 gain on the original sale will be deferred and then written off each year as a reduction in the depreciation expense on the leased warehouse.

The Turpen Company buys a machine for $30,000. Normally, the machine would be sold to a customer for $42,000. However, in hopes of expanding the number of available customers, Turpen leases the machine for 4 years to the Royal Corporation. The accountants for the Turpen Company are currently studying how this lease should be recorded for financial reporting purposes. Which of the following statements is true?

a.Because this property is normally sold, the lease contract must be recorded as a capital lease by Turpen.

b.Because this property is normally sold, the lessee (Royal) must report it as a sales-type lease.

c.If the machine has an expected life of five years, then both parties must report the transaction as a capital lease.

d.If the lease contract gives Royal the option to buy the machine at the end of four years, then both parties must report the transaction as a capital lease