Classifying Leases

On January 1, 2020, Lessee Company leases equipment with a fair value of $2,000 from Lessor Company for 3 years, with no renewal options. The estimated life of the equipment is 5 years and there is no purchase option at the end of the lease term. The annual lease payment is $700, which includes a $50 charge for an annual maintenance contract. The first payment is due immediately. Lessee Companys incremental borrowing rate is 6% and the lessee is not readily able to determine the lessors implicit interest rate. Title to the equipment remains with the lessor at lease end and the lessee does not guarantee the residual value at lease end.

a. Determine the classification of the lease for Lessee Company.	AnswerFinance LeaseOperating LeaseSales-Type Lease
b. Determine the classification of the lease for Lessor Company.	AnswerFinance LeaseOperating LeaseSales-Type Lease