Question: On January 1, 2017, Draper Inc. signed a five-year non-cancelable lease with Thornhill Company for custom-made equipment. The lease calls for five payments of $161,364.70

On January 1, 2017, Draper Inc. signed a five-year non-cancelable lease with Thornhill Company for custom-made equipment. The lease calls for five payments of $161,364.70 to be made at the beginning of each year. The leased asset has a fair value of $900,000 on January 1, 2017. There is no bargain purchase option, and ownership of the leased asset reverts to Thornhill at the lease end. The leased asset has an expected useful life of six years, and Draper uses straight-line depreciation for financial reporting purposes. Its incremental borrowing rate is 8%. Draper uses a calendar year for financial reporting purposes.

Required:

1. Under ASC 840 would Draper classify this lease as a capital lease or as an operating lease? Explain.

2. Under IAS 17, would Draper classify this lease as a finance lease or as an operating lease? Explain.

3. Under ASU 2016-02 (ASC 842) would Draper classify this lease as a finance lease or as an operating lease? Explain.

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