Lukawitz Industries leased equipment to Seminole Corporation for a four-year period, at which time possession of the leased asset will revert back to Lukawitz. The equipment cost Lukawitz $4 million and has an expected useful life of six years. Its normal sales price is $5.6 million. The present value of the minimum lease payments for both the lessor and lessee is $5.2 million. The first payment was made at the inception of the lease. Collectibility of the remaining lease payments is reasonably assured, and Lukawitz has no material cost uncertainties. How should this lease be classified (a) by Lukawitz Industries (the lessor) and (b) by Seminole Corporation (the lessee)? Why?
Answer to relevant QuestionsCan the present value of minimum lease payments differ between the lessor and lessee? If so, how?The lessor's initial direct costs often are substantial. What are initial direct costs?Could a finance (capital) lease under IFRS be classified as an operating lease under U.S. GAAP? Explain.A lease agreement calls for quarterly lease payments of $5,376 over a 10-year lease term, with the first payment at July 1, the lease's inception. The interest rate is 8%. Both the fair value and the cost of the asset to the ...On January 1, 2011, Winn Heat Transfer leased office space under a three-year operating lease agreement. The arrangement specified three annual rent payments of $80,000 each, beginning January 1, 2011, the inception of the ...
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