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13Q

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Intermediate Accounting (Kieso)
Found in: Page 1239

Short Answer

Metheny Corporation’s lease arrangements qualify as sales-type leases at the time of entering into the transactions. How should the corporation recognize revenues and costs in these situations?

Matheny Corporation should recognize the difference between the fair value and its cost or carrying amount.

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Step by Step Solution

Meaning of Lease arrangements

A lease arrangement refers to a lease contract recognizing a similar arrangement for a specified period in which the lessee is expected to pay the lessee, in whole or in part, the use of a piece of the lease for a specified period in lieu of payment time it goes.

Explaining how the corporation should recognize revenues and costs  

The difference between the fair value (normal selling price) of the asset leased to Metheny Corporation and its cost or carrying amount (book value) at the beginning of the lease for the period of the commencement of the sale-type lease and the transfer of the asset recognized as gross profit to the lessee. The remainder of the deal is classified as a direct-financing lease (that is, interest revenue is earned over the term of the lease).

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