Neinus Co. leased a new electronic widget tester to Merrell for a period of 10 y

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 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. A direct financing lease.
B. A leveraged lease.
C. An operating lease.
D. A sales-type lease.

Explanation / Answer

A. A direct financing lease.

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