Chapter 18, Problem 18.3BE

Classification as Finance or Operating Lease, Lessee. Dial Digital Solutions signed a 3-year lease at the beginning of the current year. The leased equipment has an economic life of 5 years and a fair value of $1.450. Under the terms of the lease, Dial is required to pay $500 on January 1 of each year. There is no purchase option, and Dial must return the equipment at the end of the lease term. Dial does not know the lessor’s implicit rate but recently borrowed at 5% under a 3-year loan agreement. Should Dial account for this lease as an operating or a finance lease?