Under ASC 842-10-25-2, a lease is a sales-type lease if any one of five criteria is met, including transfer of ownership (Answer B), a purchase option the lessee is reasonably certain to exercise, a lease term covering the major part of the remaining economic life, present value of payments equaling or exceeding substantially all of the fair value, or a specialized asset with no alternative use to the lessor. Transfer of ownership is one of the clearest qualifying criteria. Answer B is correct. Answer A uses 50% for the lease term test - the standard 'major part' threshold is generally interpreted as 75% or more of remaining economic life. Answer C describes the specialized asset/no-alternative-use criterion, which is also one of the five qualifying criteria but is not what is described in Answer B. Answer D applies a 75% threshold to the present value test - the correct threshold under ASC 842 for 'substantially all' is generally interpreted as 90% or more of fair value.

Interest income = Beginning net investment x Implicit rate = $100,000 x 6% = $6,000. Answer C is correct. Answer A uses the full payment as income. Answer B subtracts interest from principal incorrectly. Answer D uses the payment minus interest as income.

The net investment in the lease is the present value of (1) the lease payments receivable (including guaranteed residual value) and (2) the unguaranteed residual value accruing to the lessor, both discounted at the rate implicit in the lease. Answer A is correct. Answer B uses undiscounted gross payments. Answer C uses the carrying amount, which is relevant for computing selling profit but is not the definition of net investment. Answer D uses fair value at commencement, which may equal net investment but is not the definitional formula.

Beginning net investment = $99,364. Year 1 interest income = $99,364 x 8% = $7,949. Principal reduction = $30,000 - $7,949 = $22,051. Net investment at beginning of Year 2 = $99,364 - $22,051 = $77,313. Answer D is correct. Answer A is the original investment. Answer B subtracts the full payment without adding interest. Answer C adds interest to the investment without deducting the payment.

In a direct financing lease, the lessor records the gross receivable at the total undiscounted payments and offsets unearned interest income as a contra account, yielding a net investment equal to the present value of payments. Answer C is correct. Answer A omits the contra account. Answer B presents only the net amount without the gross receivable disclosure. Answer D records only the unearned income component.

At commencement of a sales-type lease, the lessor derecognizes the underlying asset and recognizes revenue (equal to the net investment in the lease, or fair value if lower) and cost of sales (equal to the carrying amount of the asset less PV of unguaranteed residual). The accounting mirrors a sale. The condition is met when commencement criteria are satisfied and the lease is classified as sales-type - not tied to first payment (B), a percentage threshold (C), or a guarantee requirement (D). Answer A describes the recognition framework. Answers B, C, and D are not commencement recognition triggers.

In a direct financing lease (where no selling profit is recognized), initial direct costs are added to the net investment in the lease. This reduces the effective yield and results in the costs being amortized into interest income over the lease term. Answer C is correct. Expensing at commencement (A) applies to sales-type leases with a selling profit. Adding to COGS (B) has no basis for direct financing leases. Straight-line amortization as a separate asset (D) is not the ASC 842 treatment.

Cost of sales = Carrying amount of asset - PV of unguaranteed residual = $95,000 - $8,000 = $87,000. The lessor retains the economic interest in the unguaranteed residual, so it is excluded from the cost transferred. Answer D is correct. Answer B uses full carrying amount without deducting unguaranteed residual. Answer A uses the lease payment PV. Answer C adds rather than subtracts the unguaranteed residual.

Under ASC 842, interest income on both sales-type and direct financing leases is recognized using the effective interest method. The implicit rate is applied to the beginning-of-period net investment to calculate interest income, and principal is reduced by the difference between the payment received and interest earned. Answer C is correct. Straight-line (A), sum-of-the-years'-digits (B), and units-of-production (D) are not prescribed methods for lease interest income under ASC 842.

Gross profit = Revenue - Cost of sales = $110,000 - $85,000 = $25,000. Answer A is correct. Answer B uses only revenue. Answer C uses only cost of sales. Answer D adds revenue and cost.