(b) The information below relates to a leasing arrangement between Simmonds Leasing Company and Telsan Company, a lessee.

Inception date January 1, 2020

Lease term 6 years

Annual lease payment due at the beginning of

each year, beginning with January 1, 2020 $150,000

Fair value of asset at January 1, 2020 $760,000

Economic life of leased equipment 7 years

Residual value of equipment at end of lease term,

guaranteed by the lessee $65,500

Lessors implicit rate 10%

Lessees incremental borrowing rate 12%

January 1, 2020

The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $65,500. The lessee uses the straight-line depreciation method for all equipment.

Instructions

5. Discuss the nature of this lease to Simmonds Leasing Company. (3 marks)