Present value of the lease payments

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Consider a lessor that sells the right to use a depreciable asset, with a book value of $1,500, to a customer for two years for $1,000 per year, payable at the beginning of the year. At the end of the lease term, the rights to the asset revert to the seller. Assuming a discount rate of 10 percent, the present value of the lease payments is $1,909. What are the financial statement effects of this transaction if (a) revenue is recognized under the sales-type lease approach, and (b) revenue is recognized using the operating lease method? What forecasts, if any, do you have to make to complete the recording of this transaction? What factors would determine which of these two approaches is appropriate? As a financial analyst, what questions would you raise with the firm's CFO.

Reference no: EM131034554

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