$8.$ Lease Classification

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Situation

Lease term $($years$)$

$5$

Asset's useful life $($years$)$

$7$

Asset's fair value

$$142,000$

Bargain purchase option?

No

Annual lease payments

Beg. of yr$.$

Lessor's implicit rate $($known by lessee$)$

$6\%$

Lessee's incremental borrowing rate

$6\%$

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Question $1)$ Does the agreement specify that ownership of the asset transfers to the lessees?

a$.$ YES

b$.$ NO

Question $2)$ Does the agreement contain a purchase option that is reasonably certain to be exercised?

a$.$ YES

b$.$ NO

Question $3)$ Does the lease constitute the major part of the expected economic life of the asset?

a$.$ YES

b$.$ NO

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Question $4)$ Is the present value of the lease payments greater than or equal to substantially all of the fair value of the asset?

a$.$ YES

b$.$ NO

Question $5)$ Is the asset of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term?

a$.$ YES

b$.$ NO

Question $6)$ What is the appropriate lease classification by the lessee?

a$.$ Operating Lease

b$.$ Finance Lease