Chapter 18, Problem 18.5BE

Classification as Finance or Operating Lease, Lessee. Iman Iron Works signed a lease on January 1 with Borko Bank for an iron-stamping machine. The equipment is not specialized in nature. The lease has a 12-year term with no purchase option or transfer of ownership Under the terms of the contract, Iman must pay $3,500 on January 1 of each year. Borko Bank's implicit rate is 12%. The iron-stamping machine has an economic life of 25 years and a fair value of $35,000. If Iman borrowed at Borko Bank, the loan would carry an interest rate of 14%. The lessee knows the implicit rate. Is this contract an operating or a finance lease for the lessee?