Question
Consider the following terms of a lease. 1. The lease term is 5 years. The lease is noncancelable and requires equal payments of $50,000 at
Consider the following terms of a lease. 1. The lease term is 5 years. The lease is noncancelable and requires equal payments of $50,000 at the beginning of each year, beginning January 1, 2019. 2. The leased asset is a standard piece of equipment. 3. The cost, and fair value, of the equipment to Lessor at the inception of the lease is $350,000. The equipment has an estimated economic life of 10 years and has a zero estimated residual value at the end of this time. 4. There is no guarantee of the residual value by Lessee. 5. The lease contains no purchase option and no agreement to transfer ownership at the end of the lease. 6. Lessee's incremental borrowing rate is 12% per year. Lessee is not able to determine the interest rate implicit in the lease. 7. The present value of an annuity due of 5 payments of $50,000 each at 12% is $201,867.45 (4.037349 $50,000 = $201,867.45). How does the lessee classify the lease?
Finance lease
Sales-type lease
Operating lease
This is not a lease
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