Question
Federated fabrications leased a tooling machine on January 1, 2021, for a three-year period ending December 31, 2023. The lease agreement specified annual payments of
Federated fabrications leased a tooling machine on January 1, 2021, for a three-year period ending December 31, 2023. The lease agreement specified annual payments of $37,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2022. The company had the option to purchase the machine on December 30, 2023, for $46,000 when its fair value was expected to be $61,000, a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Federated was aware that the lessor's implicit rate of return was 11%.
1) As indicated in class many times, list and briefly explain the 5 criteria to determine if this is a finance lease.
2) Is this a financing lease? How many of the criteria does this lease meet (that you can identify based on the information provided)?
3) Bonus (3 Points): Calculate the amount Federated should record as a right-of-use asset and lease liability for this finance lease.
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