Atlanta Tours Company entered into a five-year lease on January 1, Year 1, with Duck Boats, Inc. for a customized duck boat. Duck Boats, Inc. will provide a vehicle to Atlanta Tours Company with the words "Gone with the Wind" carved into the sides. Following are the terms of the lease arrangement.
Fair value of the wagon at the inception of the lease is $10,000
There is an eight-year estimated economic life
Estimated (unguaranteed) residual value is $3,500. Atlanta Tours Company does not absorb any gains or losses in fluctuations of the fair value of the residual value.
Annual lease payments of $2,000 are due on January 1 of each year. The implicit interest rate in the lease is 6 percent.
There is an option to purchase at end of lease term for $4,000.
The lease is noncancelable and may not be extended.
Required:
Discuss whether Atlanta Tours Company should classify this lease as an operating lease or as a finance lease under (a) IFRS and (b) U.S. GAAP.
Discuss your reasoning.