Assume that Speery agrees to lease a new machine from LEERY on January 1,2011,for $30,000 per year,paid in advance (i.e.,at the beginning of the year).The lease term is 10 years and the asset's useful life is 8 years.There is no bargain purchase option.The unguaranteed residual value is $10,000.Which statement is correct?
A)The unguaranteed residual will be recorded on Speery's balance sheet.
B)The lease is an operating lease.
C)The lease is a finance lease.
D)More information is needed to determine the accounting treatment.

Question

Quizplus · Accepted Answer

The lease meets the criteria of a finance lease because the lease term is greater than or equal to 75% of the asset's useful life (10/8 = 1.25) and there is no bargain purchase option. As a result, Speery will record the leased machine as an asset and a liability on their balance sheet. The unguaranteed residual value will not be recorded as an asset or liability.

Assume That Speery Agrees to Lease a New Machine from LEERY