Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 20X1 under the following terms: Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year.The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor.The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term.The tractor has a six-year economic life.Morey has an excellent credit rating.Equity offers no warranty on the tractor other than the manufacturer’s two-year warranty that is handled directly with the manufacturer. For Equity Leasing, this is treated as a(n) Multiple Choice operating lease. short-term lease. finance capital lease. sales-type capital lease.

Finance Capital lease is a lease agreement in which the lessor agrees to transfer the ownership rights to the lessee after the completion of the lease period. Capital or finance leases are long term and non cancellable in nature.For Equity Leasing, this is treated as a(n) Answer Option c:finance capital lease Explanation: The finance company is typically the legal owner of the asset for the duration of the lease, while the lessee has operating control over the asset and some share of the economic risks and returns. There is ownership transfer at the end of the lease, as well. The lease life exceeds 75% of the asset's economic life. The lease period covers major life of asset. Hence it is a finance lease. Hence, option a,b and d are incorrect. Correct answer is option C.

Answered: Morey Corporation leases a tractor from…

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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Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 20X1 under the following terms:

Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year.
The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor.
The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term.
The tractor has a six-year economic life.
Morey has an excellent credit rating.
Equity offers no warranty on the tractor other than the manufacturer’s two-year warranty that is handled directly with the manufacturer.

For Equity Leasing, this is treated as a(n)

Multiple Choice

operating lease.
short-term lease.
finance capital lease.
sales-type capital lease.

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