Question

Each of the four independent situations below describes a lease requiring annual requiring annual lease payments of $30,000.

Situation	1	2	3	4
Lease term (years)	4	4	4	4
Asset's Useful Life (years)	6	6	5	6
Asset's fair value	$132,000	$123,000	$129,000	$117,00
Bargain Purchase option?	no	no	yes	no
Annual lease payments	Beg. of yr.	Beg. of yr.	End of yr.	End of yr.
Lessor's implicit rate (known by the lessee)	5%	5%	7%	6%
Lessee's incremental borrowing rate	5%	5%	5%	5%

For Each of the four situations, determine the appropriate lease classification (operating or capital lease by the lessee and indicate why

1.

2.

3.

4.

Answer 1