Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease Includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's Implicit lease rate, known to the lessee, Is 10%. The lessor and the lessee use ASC 842 guldelines for lease accounting. Present value Interest factors are: 10% 12% PV factor of $1 for 10 periods PV factor for ordinary annuity for 10 periods 0.38554 0.32197 6.14457 5.65022 The Pepper lease Is a(n): Multiple Cholce short-term lease because the lease value is less than the fair value of the asset. finance lease because the lease term covers the major part of the economic life of the asset. operating lease because the asset reverts to Blue at the end of the lease. operating lease because ownership does not automatically transfer to the lessee at the end of the lease term.
Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease Includes a guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a maintenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's Implicit lease rate, known to the lessee, Is 10%. The lessor and the lessee use ASC 842 guldelines for lease accounting. Present value Interest factors are: 10% 12% PV factor of $1 for 10 periods PV factor for ordinary annuity for 10 periods 0.38554 0.32197 6.14457 5.65022 The Pepper lease Is a(n): Multiple Cholce short-term lease because the lease value is less than the fair value of the asset. finance lease because the lease term covers the major part of the economic life of the asset. operating lease because the asset reverts to Blue at the end of the lease. operating lease because ownership does not automatically transfer to the lessee at the end of the lease term.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.
Mortgage
The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yearly payments.
Question
Transcribed Image Text:Pepper, Inc. agrees to lease equipment from the Blue Corporation for 10 years at $25,000 at the end of each
year. The equipment has a fair value of $175,000 and an estimated useful life of 10 years. The lease includes a
guaranteed residual value of $10,000. In addition to the lease payments, Pepper will pay $5,000 per year for a
malntenance agreement. Pepper can finance this lease with its bank at a 12% rate. The lessor's Implicit lease
rate, known to the lessee, Is 10%. The lessor and the lessee use ASC 842 guldelines for lease accounting.
Present value Interest factors are:
10%
12%
PV factor of $1 for 10 periods
PV factor for ordinary annuity for 10 periods
0.38554
0.32197
6.14457
5.65022
The Pepper lease Is a(n):
Multiple Choice
short-term lease because the lease value is less than the falr value of the asset.
finance lease because the lease term covers the major part of the economlc life of the
asset.
operating lease because the asset reverts to Blue at the end of the lease.
operating lease because ownership does not automatically transfer to the lessee at the
end of the lease term.
Expert Solution
Step 1- Answer
Correct option:
Finance lease because the lease term covers the major part of the economic life of the assets.
Incorrect options:
Short term lease because the lease value is less than the fair value of the assets.
Operating lease because the asset reverts to Blue at the end of the lease.
Operating lease because ownership does not automatically transfer to the lessee at the end of the lease term.
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