Response to the following problem:
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.
|
Situation |
|
|
|
1
|
2
|
2
|
4
|
|
Lease term (years)
|
4
|
4
|
4
|
4
|
|
Asset's useful life (years)
|
6
|
5
|
6
|
6
|
|
Asset's fair value
|
$44,000
|
$43,000
|
$41,009
|
$39,000
|
|
Bargain purchase option?
|
No
|
Yes
|
No
|
No
|
|
Annual lease payments
|
Beg. of yr.
|
End of yr.
|
Beg. of yr..
|
End of yr.
|
|
Lessor's implicit rate (known by lessee)
|
5%
|
6%
|
5%
|
6%
|
|
Lessee's incremental borrowing rate
|
5%
|
5%
|
5%
|
5%
|