Chapter 18, Problem 18.2MC

Zhou Systems signed a 5-year lease at the beginning of the current year. The leased equipment is from standard dealer stock and has an economic life of 8 years and a fair value of $21,500. Under the terms of the lease, Zhou is required to pay $4,500 at the beginning of each year. There is no purchase option and Zhou must return the equipment at the end of the lease term. The lessor does anticipate there will be a positive residual value but it is unguaranteed Zhou knows the lessor’s implicit rate is 6%. The proper classification of this lease for the lessee is:

1. a. Operating lease
2. b. Finance lease
3. c. Direct financing lease
4. d. Sales-type lease