A piece of manufacturing machinery is to be leased by the Jones Company. The mac

Question

A piece of manufacturing machinery is to be leased by the Jones Company. The machine has a useful life of 10 years. The term of the lease is 2 years. Jones Company, as the lessee, will be

able to deduct 100% of the monthly lease payments as Rental Expense on its income statement.   At the end of the lease term, the machine will be still be owned by the leasing company and will be returned to that company by the lessee. What type of lease has been entered into by the Jones Company?   

Explanation / Answer

B) operatin Lease

it is a lease which do not transfer all the risks and rewards incidental to owner ship.

lease payments under an operating lease should berecognized as an expense in statement of profit and loss on a straight line basis over the period of lease term.

Also, The lessee will not get the ownership of leased asset at the end of lease term

The lease term doesnt cover the major part of life of asset. ( 2 years for lease out of 10 years estimated life)

All the conditions are satisfied, So it was an operating lease

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