Each of the four independent situations below describes a lease requiring annual lease payments of $10,000. For each situation, determine the appropriate lease classification by the lessee and indicate why. Situations 1234Lease terms (years)4444Asset's useful life (years)6566Asset's fair value $ 44,000 $ 45,000 $ 41,000 $ 38,500Purchase option that is reasonably certain to be exercised?NoYesNoNoAnnual lease paymentsBeginning of YearEnd of YearBeginning of YearEnd of YearLessor's implicit rate (known by lessee)5%6%5%6%Lesse's incremental borrowing rate5%5%5%5%

Lessee is the owner of the equipment and he is interest in giving the right to use the equipment by…

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Each of the four independent situations below describes a lease requiring annual lease payments of $10,000. For each situation, determine the appropriate lease classification by the lessee and indicate why.

	Situations
	1	2	3	4
Lease terms (years)	4	4	4	4
Asset's useful life (years)	6	5	6	6
Asset's fair value	$ 44,000	$ 45,000	$ 41,000	$ 38,500
Purchase option that is reasonably certain to be exercised?	No	Yes	No	No
Annual lease payments	Beginning of Year	End of Year	Beginning of Year	End of Year
Lessor's implicit rate (known by lessee)	5%	6%	5%	6%
Lesse's incremental borrowing rate	5%	5%	5%	5%

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