Problem
Lessor leases three boats to Lessee to be used in its parasailing business for five years. Lessee also agrees to maintain each piece of equipment throughout the lease term. The total consideration in the contract is $350,000 payable in $70,000 annual installments. Lessee is able to establish observable standalone prices for the boats on the basis of the price the lessor, and other lessors, lease similar boats on a standalone basis. The standalone prices for the boats are as follows. Boat 1 $180,000 Boat 2 120,000 Boat 3 85,000 Total $385,000 Determine the separate lease and non-lease components and explain why each the components qualify for separation. Determine the amounts that should be allocated to each lease component (and non-lease component).