On January 1, Lessee Company leases equipment with a fair value of $2,000 from Lessor Company for 3 years, with no renewal options. The estimated life of the equipment is 5 years and there is no purchase option at

 

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On January 1, Lessee Company leases equipment with a fair value of $2,000 from Lessor Company for 3 years, with no renewal options. The estimated life of the equipment is 5 years and there is no purchase option at the end of the lease term. The annual le payment is $700, which includes a $50 charge for an annual maintenance contract. The first payment is due immediately. Lessee Company's incremental borrowing rate is 6% and the lessee is not readily able to determine the lessor's implicit interest rate. Titl the equipment remains with the lessor at lease end and the lessee does not guarantee the residual value at lease end. a. Determine the classification of the lease for Lessee Company. b. Determine the classification of the lease for Lessor Company. Option One Lease Classification Criteria Criterion Met? 1. Ownership transfer 2. Purchase option 3. Lease term length 4. Present value of lease payments 5. No alternative use + + year lease term is PV of lease payments of S is Analysis of the asset's useful life of % % of the asset's fair value of $ years.

• Expert Answer

a To determine the classification of the lease for Lessee Company we need to evaluate the lease against the lease classification criteria outlined in View the full answer