Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life with $10,000 guaranteed residual value. The rate implicit in the lease (which is known by Pisa, Inc.) is 8%. A. Is it a financing lease or operating lease? Explain why. (You do not need to discuss all five tests). B. What are the main differences between a finance lease and operating lease? C. How much would Tower Company, the lessor, record as an initial receivable? (Hint: think PV testing amount)
Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring equal annual payments of $344,152, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life with $10,000 guaranteed residual value. The rate implicit in the lease (which is known by Pisa, Inc.) is 8%.
A. Is it a financing lease or operating lease? Explain why. (You do not need to discuss all five tests).
B. What are the main differences between a finance lease and operating lease?
C. How much would Tower Company, the lessor, record as an initial receivable? (Hint: think PV testing amount)
A. This lease is a financing lease. One of the key indicators of a financing lease is that it transfers substantially all of the risks and rewards of ownership to the lessee. In this case, the lease term is for a significant portion of the equipment's useful life, and the lessee is responsible for maintaining and insuring the equipment. Additionally, there is a guaranteed residual value at the end of the lease, which further indicates that the lessee has assumed the risks and rewards of ownership.
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