On January 1, 2011, Nelson, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from ABC Company. The following information pertains to this lease agreement.
1. The agreement requires equal rental payments at the end of each year.
2. The fair value of the building on January 1, 2011 is $3,000,000; however, the book value to ABC is $2,500,000.
3. The building has an estimated economic life of 10 years, with no residual value. Nelson depreciates similar buildings on the straight-line method.
4. At the termination of the lease, the title to the building will be transferred to the lessee.
5. Nelson's incremental borrowing rate is 11% per year. ABC Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Nelson Ltd.
6. The yearly rental payment includes $10,000 of executory costs related to taxes on the property
a) What is the amount of the minimum annual lease payment? (Rounded to the nearest dollar.)
b) From the lessee's viewpoint, what type of lease exists in this case?
c) If the lease were nonrenewable, there was no purchase option, title to the building does not pass to the lessee at termination of the lease and the lease were only for eight years, what type of lease would this be for the lessee?