Shelby Inc. is in the process of negotiating a lease of equipment with a fair value of $220,000 and must determine the proper lease classification. Ownership transfer Purchase option Length of lease term (in years) Economic life of equipment (in years) No alternative use of equipment at lease end No No 10 12 No $27,500 Unknown to lessee Incremental borrowing rate of lessee 6% Payment type Beginning of period Annual lease payment Implicit rate of lease Determine the proper lease classification assuming that Shelby Inc. is the lessee. Lease Classification Criteria Criterion Met? 1. Ownership transfer 2. Purchase option Analysis 3. Lease term length year lease term is % of the asset's useful life of years. 4. Present value of lease payments 5. No alternative use PV of lease payments of $ is % of the asset's fair value of $ Lease type:
Shelby Inc. is in the process of negotiating a lease of equipment with a fair value of $220,000 and must determine the proper lease classification. Ownership transfer Purchase option Length of lease term (in years) Economic life of equipment (in years) No alternative use of equipment at lease end No No 10 12 No $27,500 Unknown to lessee Incremental borrowing rate of lessee 6% Payment type Beginning of period Annual lease payment Implicit rate of lease Determine the proper lease classification assuming that Shelby Inc. is the lessee. Lease Classification Criteria Criterion Met? 1. Ownership transfer 2. Purchase option Analysis 3. Lease term length year lease term is % of the asset's useful life of years. 4. Present value of lease payments 5. No alternative use PV of lease payments of $ is % of the asset's fair value of $ Lease type:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Shelby Inc. is in the process of negotiating a lease of equipment with a fair value of $220,000 and must determine the proper lease classification.
Ownership transfer
Purchase option
Length of lease term (in years)
Economic life of equipment (in years)
No alternative use of equipment at lease end
No
No
10
12
No
$27,500
Unknown to lessee
Incremental borrowing rate of lessee
6%
Payment type
Beginning of period
Annual lease payment
Implicit rate of lease
Determine the proper lease classification assuming that Shelby Inc. is the lessee.
Lease Classification Criteria Criterion Met?
1. Ownership transfer
2. Purchase option
Analysis
3. Lease term length
year lease term is
% of the asset's useful life of
years.
4. Present value of lease payments
5. No alternative use
PV of lease payments of $
is
% of the asset's fair value of $
Lease type:
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