2) Given the following information, apply each of the criteria above and then conclude if the...

Transcribed Image Text:

2) Given the following information, apply each of the criteria above and then conclude if the lease is operating or financing. • The lease term is 4 years; is non-cancellable; and requires equal lease payments of $61,000 at the beginning of each year. • The lessee's incremental borrowing rate is 6% and the lessor's sets the annual return on leased assets to 5%. The lessee is aware of the lessor's established annual return (this is their implicit rate of return although the text wasn't clear on this issue). • The fair market value of the leased asset is $227,500 and has a useful life of 5 years with no expected economic value at the end of the lease. Thus, the lease has no guaranteed or non- guaranteed residual value for the asset. The lease does not contain any renewal option and the asset reverts to the lessor at the end of the term. The lessee may purchase the asset at its fair market value at the end of the lease. • The lessee depreciates similar equipment that it owns on a straight-line basis. • The lessor has an alternative use for the asset at the end of the lease period. 2) Given the following information, apply each of the criteria above and then conclude if the lease is operating or financing. • The lease term is 4 years; is non-cancellable; and requires equal lease payments of $61,000 at the beginning of each year. • The lessee's incremental borrowing rate is 6% and the lessor's sets the annual return on leased assets to 5%. The lessee is aware of the lessor's established annual return (this is their implicit rate of return although the text wasn't clear on this issue). • The fair market value of the leased asset is $227,500 and has a useful life of 5 years with no expected economic value at the end of the lease. Thus, the lease has no guaranteed or non- guaranteed residual value for the asset. The lease does not contain any renewal option and the asset reverts to the lessor at the end of the term. The lessee may purchase the asset at its fair market value at the end of the lease. • The lessee depreciates similar equipment that it owns on a straight-line basis. • The lessor has an alternative use for the asset at the end of the lease period.

Answer rating: 100% (QA)

Answer A lease is normally classified as a finance lease if any of the following conditions apply A ... View the full answer