Martius Company, a maker of high-tech gadgets, routinely leases equipment made b
ID: 2577918 • Letter: M
Question
Martius Company, a maker of high-tech gadgets, routinely leases equipment made by competitors in order to reverse-engineer design features Martius may want to incorporate in its own products. The reverse-engineering process is part of Martius's 9-month product development cycle and involves disassembling then later reassembling the equipment. LeaseCo. leases such equipment to Martius under a 12-month lease term. According to the terms of the lease, at the end of the lease term Martius will have the option to purchase the equipment for less than its expected fair value at that time. Martius Company is located in an area where commercial space is at a premium, there is no internal use for the competitor equipment at the end of Martius's product development cycle, and Martius's management wishes to focus solely on the manufacture and sale of its own equipment. Management also wishes to minimize liabilities reported on the balance sheet. In light of the above, as which type of lease is Martius most likely to record, correctly, its arrangement with LeaseCo.? Multiple Choice As an operating lease. Not enough information to decide As a finance lease As a short-term lease.Explanation / Answer
Operating LEase : In operating Lease all risks and rewards related to asset ownership remain with the lessor for the leased asset is called operating lease. In this lease, the asset is returned by the lessee after using it for lease term agreed upon.
In financial lease all the risks and rewards of related to ownership of asset leased are transferred to the lessee.In financial lease .Ownership transfer option at the end of the lease period is there with the lessee. Title might or might not be transferred eventually.
In the given question the ownership transfer option is there at the end of lease period so this is a Fiannce Lease.
Answer = Option 3= Fianance Lease
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