On January 1, Year 1, Amira’s Stables Corp., which reports its financial results in accordance with ASPE, entered into a contract to lease a tractor, details of which follow: Lease term 2 years Economic life of equipment 5 years Lease payment $7,000 first due January 1, Year 1 FV of asset $15,000 Implicit rate in the lease (not known by lessee) 4% Incremental borrowing rate 6% Option to purchase No Guaranteed residual value No Amira uses the straight-line method of depreciation for its assets.
On January 1, Year 1, Amira’s Stables Corp., which reports its financial results in accordance with ASPE, entered into a contract to lease a tractor, details of which follow: Lease term 2 years Economic life of equipment 5 years Lease payment $7,000 first due January 1, Year 1 FV of asset $15,000 Implicit rate in the lease (not known by lessee) 4% Incremental borrowing rate 6% Option to purchase No Guaranteed residual value No Amira uses the straight-line method of depreciation for its assets.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
On January 1, Year 1, Amira’s Stables Corp., which reports its financial results in
accordance with ASPE, entered into a contract to lease a tractor, details of which follow:
Lease term 2 years
Economic life of equipment 5 years
Lease payment $7,000 first due January 1, Year 1
FV of asset $15,000
Implicit rate in the lease (not known by lessee) 4%
Incremental borrowing rate 6%
Option to purchase No
Guaranteed residual value No
Amira uses the straight-line method of depreciation for its assets.
Using the issue-analysis-recommendation (IAR) approach, determine if Amira
Stables should classify the lease as a capital lease or an operating lease by
evaluating the three primary ASPE criteria.
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