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Each of the four independent situations below describes a lease requiring annual lease payments of $30,000. Situation 1 2 3 4 Lease term (years) 4
Each of the four independent situations below describes a lease requiring annual lease payments of $30,000.
Situation | 1 | 2 | 3 | 4 | |
Lease term (years) | 4 | 4 | 4 | 4 | |
Assets useful life (years) | 6 | 6 | 5 | 6 | |
Assets fair value | $132,000 | $123,000 | $129,000 | $117,000 | |
Bargain purchase option? | NO | NO | YES | NO | |
Annual lease payments | Beg. of yr | . Beg. of yr | . End of yr | . End of yr. | |
Lessors implicit rate (known by lessee) | 5% | 5% | 7% | 6% | |
Lessees incremental borrowing rate | 5% | 5% | 5% | 5% | |
Required: For each situation, determine the appropriate lease classification by the lessee and indicate why.
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