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Ivanhoe Company leases a building to Metlock, Inc. on January 1, 2020. The following facts pertain to the lease agreement. 1. The lease term is
Ivanhoe Company leases a building to Metlock, Inc. on January 1, 2020. The following facts pertain to the lease agreement.
1. | The lease term is 6 years, with equal annual rental payments of $4,608 at the beginning of each year. | ||||||||||||||||||
2. | Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. | ||||||||||||||||||
3. | The building has a fair value of $26,000, a book value to Ivanhoe of $19,000, and a useful life of 7 years. | ||||||||||||||||||
4. | At the end of the lease term, Ivanhoe and Metlock expect there to be an unguaranteed residual value of $4,750. | ||||||||||||||||||
5. | Ivanhoe wants to earn a return of 8% on the lease, and collectibility of the payments is probable. Metlock was unaware of the implicit rate used in the lease by Ivanhoe and has an incremental borrowing rate of 9%
How would Ivanhoe (lessor) and Metlock (lessee) classify this lease?
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