Kendore Electric Limited is about to enter into a lease with annual lease payments of $211 550 for a6 year term. The lease is for two machines that will replace outdated ones. The company's tax rateis 28% and its borrowing rate is 6%. The first lease payment is due when the contract is signed. The machines cost$1 100 000 and have a useful life of 10 years. At the end of the lease term, the lessor retains ownership of the assets but the lessee may at that time purchase them at fair market value. Whattype of lease is this?
A) A financial lease
B) A leveraged lease
C) An operating lease
D) A sale-leaseback arrangement

Question

Quizplus · Accepted Answer

This is an operating lease since the lessor retains ownership of the assets at the end of the lease term, and the lessee has the option to purchase them at fair market value. A financial lease would result in transfer of ownership to the lessee at the end of the lease term, while a leveraged lease involves a third-party lender. A sale-leaseback arrangement involves the sale of owned assets to a lessor who then leases them back to the original owner.

Kendore Electric Limited Is About to Enter into a Lease