Case 13-4 Lease Classification Nonspecialized Equipment Lease Morgan Corp enters into a lease of nonspecialized equipment with Hoffman Corp. The following is information about the lease:

Lease term five years, no renewal option Economic life of the equipment six years No purchase option Annual lease payments $11,000 Payment date annually on January 1 Morgan Corps incremental borrowing rate is 7% The interest rate Hoffman Corp charges Morgan Corp in the lease is not readily determinable by Morgan Corp. Title to the asset remains with Hoffman Corp upon lease expiration The fair value of the equipment is $50,000 Morgan Corp does not guarantee the residual value of the equipment at the end of the lease term Morgan Corp pays for all maintenance of the equipment separate from the lease There are no initial direct costs incurred by Morgan Corp Hoffman Corp does not provide any incentives Required:

1.How should Morgan Corp classify the lease? 2.How would Morgan Corp measure and record this lease? 3.How would Morgan Corp measure the right-of-use asset and lease liability over the lease term?