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Classifying Leases 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 lease 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. Title to 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 Finance Lease O b. Determine the classification of the lease for Lessor Company. Sales-Type Lease 0 Option One Lease Classification Criteria Criterion Met? 1. Ownership transfer No 2. Purchase option No X Lease term length No Present value of lease payments Yes S No alternative use Yes ✔ ✔ 94 3 V of lease payments of s year lease term is 1.983 x is Analysis 60.0% of the asset's useful life of 99.2% of the asset's fair value of 1 5 years 2,000

Classifying Leases 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 lease 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. Title to 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 Finance Lease O b. Determine the classification of the lease for Lessor Company. Sales-Type Lease 0 Option One Lease Classification Criteria Criterion Met? 1. Ownership transfer No 2. Purchase option No X Lease term length No Present value of lease payments Yes S No alternative use Yes ✔ ✔ 94 3 V of lease payments of s year lease term is 1.983 x is Analysis 60.0% of the asset's useful life of 99.2% of the asset's fair value of 1 5 years 2,000

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Classifying Leases 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 lease 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. Title to 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. Finance Lease b. Determine the classification of the lease for Lessor Company. Sales-Type Lease Option One Lease Classification Criteria Criterion Met? 1. Ownership transfer 2. Purchase option No No No 3. Lease term length 4 Present value of lease payments Ves 5 No alternative use Yes DOOOO ✔ ✓ •✔ year lease term is 1.983 x is ✓ 3 V of lease payments of st x Analysis 60.0% of the asset's useful life of 99.2% of the asset's fair value of $ 5 years. 2,000✔
Transcribed Image Text:Classifying Leases 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 lease 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. Title to 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. Finance Lease b. Determine the classification of the lease for Lessor Company. Sales-Type Lease Option One Lease Classification Criteria Criterion Met? 1. Ownership transfer 2. Purchase option No No No 3. Lease term length 4 Present value of lease payments Ves 5 No alternative use Yes DOOOO ✔ ✓ •✔ year lease term is 1.983 x is ✓ 3 V of lease payments of st x Analysis 60.0% of the asset's useful life of 99.2% of the asset's fair value of $ 5 years. 2,000✔
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