ABC Ltd leases a mini-bus from XYZ Ltd for 5 years. The mini-bus has a useful life of 6 years and a fair value of $30,540. The lease is non-cancellable. Under the lease, ABC will pay $10,000 every year including $2,000 in executory costs. The lease has an interest rate of 12%. ABC can purchase the asset for $3,000 at the end of the fifth year. The estimated residual value is $4,540 (at the end of the useful life). The facts of the lease arrangement suggest that the lessor ought to classify the lease as a finance lease which is supported by the following statements:

i. The risks of using the leased asset are borne by the lessor as the lease is non-cancellable

 ii. All the rewards from using the leased asset are received by the lessee given that the lease covers the majority of the useful life of the asset (5/6 years) 

iii. All the rewards from using the leased asset are received by the lessee given that the lessee is given an option to purchase the asset at a bargain price at the end of the lease term 

iv. The minimum lease payment is the same as the

Answer rating: 100% (QA)

To determine whether the lease should be classified as a finance lease we can analyze the criteria p... View the full answer