• Fair value of the asset: $400,000. • Useful life of the asset: 6 years with no salvage value. • Lease term is 5 years. • Annual lease payments are $60,000 Implicit interest rate: 11%. • Minnetonka can purchase the asset at the end of the lease period for $50,000. How should the lessee classify this lease? A) Operating. B) Finance. C) Short term. D) Long term. O A OB

FINANCIAL ACCOUNTING
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Chapter1: Financial Statements And Business Decisions
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Minnetonka Company leases an asset. Information regarding the lease (Minnetonka is the lessee):
• Fair value of the asset: $400,000.
• Useful life of the asset: 6 years with no salvage value.
Lease term is 5 years.
• Annual lease payments are $60,000
Implicit interest rate: 11%.
• Minnetonka can purchase the asset at the end of the lease period for $50,000.
How should the lessee classify this lease?
A) Operating.
B) Finance.
C) Short term.
D) Long term.
O B
O O OO
Transcribed Image Text:Minnetonka Company leases an asset. Information regarding the lease (Minnetonka is the lessee): • Fair value of the asset: $400,000. • Useful life of the asset: 6 years with no salvage value. Lease term is 5 years. • Annual lease payments are $60,000 Implicit interest rate: 11%. • Minnetonka can purchase the asset at the end of the lease period for $50,000. How should the lessee classify this lease? A) Operating. B) Finance. C) Short term. D) Long term. O B O O OO
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Step 1

Introduction:-

  • Leasing is an agreement between parties in which the right to use the asset is transferred to another person.
  • Two persons involved (Lessor and lessee)
  • Only right to use an asset is transferred by the lessor to lessee without transferring the ownership of the asset.
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