Question

Suppose that you are the owner of a car dealership that sells and leases cars. When customers lease a vehicle, they are required to sign a three-year or five-year lease. A lease is a contract whereby the customer agrees to make monthly payments for the duration of the lease period. There are penalties if the customer decides to return the vehicle before the end of the lease. During the lease, the customer is required to keep the vehicle in good condition with respect to mechanical operations and appearance. When the customer returns the vehicle at the end of the lease, it is inspected for damage. The customer is often expected to pay for mechanical work or repainting that is required.
Required:
a. Using revenue recognition criteria, explain when you would recognize the revenue from the monthly lease payments.
b. How is your decision affected by your awareness that the customers pay a penalty if they return the vehicle early and that they pay for any damages at the end of the lease term?


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  • CreatedJune 11, 2015
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