Judgment Case 2: Lease Classification On January 1, 2019, Lessee Company leased a piece of machinery from Lessor Bank. The machinery could also be used by other parties. The 14-year lease requires payments of $250,000 due at the beginning of each year. The lease agreement does not transfer ownership of the machinery nor does it contain a purchase option. Lessor Bank anticipates that the asset will have a residual value at the end of the lease term, but this value is not guaranteed by Lessee or a third party. The machinery has a fair value of $2,628,000 and an estimated life of 19 years. Lessor Bank's implicit rate is 7% and is known by Lessee Company. Do you think Lessee should classify this as an operating lease or a finance lease? Explain your answer.
Judgment Case 2: Lease Classification On January 1, 2019, Lessee Company leased a piece of machinery from Lessor Bank. The machinery could also be used by other parties. The 14-year lease requires payments of $250,000 due at the beginning of each year. The lease agreement does not transfer ownership of the machinery nor does it contain a purchase option. Lessor Bank anticipates that the asset will have a residual value at the end of the lease term, but this value is not guaranteed by Lessee or a third party. The machinery has a fair value of $2,628,000 and an estimated life of 19 years. Lessor Bank's implicit rate is 7% and is known by Lessee Company. Do you think Lessee should classify this as an operating lease or a finance lease? Explain your answer.
Solution Summary: The author explains whether the lease should be classified as an operating lease or a finance lease.
On January 1, 2019, Lessee Company leased a piece of machinery from Lessor Bank. The machinery could also be used by other parties. The 14-year lease requires payments of $250,000 due at the beginning of each year. The lease agreement does not transfer ownership of the machinery nor does it contain a purchase option. Lessor Bank anticipates that the asset will have a residual value at the end of the lease term, but this value is not guaranteed by Lessee or a third party. The machinery has a fair value of $2,628,000 and an estimated life of 19 years. Lessor Bank's implicit rate is 7% and is known by Lessee Company.
Do you think Lessee should classify this as an operating lease or a finance lease? Explain your answer.
The following transactions involving intangible assets of Oriole Corporation occurred on or near December 31, 2025.
1.) Oriole paid Grand Company $520,000 for the exclusive right to market a particular product, using the Grand name and logo in promotional material. The franchise runs for as long as Oriole is in business.
2.) Oriole spent $654,000 developing a new manufacturing process. It has applied for a patent, and it believes that its application will be successful.
3.) In January 2026, Oriole's application for a patent (#2 above) was granted. Legal and registration costs incurred were $247,800. The patent runs for 20 years. The manufacturing process will be useful to Oriole for 10 years.
4.) Oriole incurred $168,000 in successfully defending one of its patents in an infringement suit. The patent expires during December 2029. Oriole incurred
5.) $446,400 in an unsuccessful patent defense. As a result of the adverse verdict, the patent, with a remaining unamortized cost of…
None
Please provide the solution to this general accounting question with accurate financial calculations.
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