On January 1, 2020, Dionne Ltd. signs a 10-year non-cancellable lease agreement to lease a storage building from Seline Inc. Seline is in the business of leasing/selling property. Collectibility of the lease payments is reasonably assured and no additional costs are to be incurred by the lessor (other than executory costs). Both the lessor and the lessee are private corporations adhering to ASPE. The following information is available regarding this lease agreement:
1) The agreement requires equal payments at the end of each year.
2) At January 1, 2020, the fair value of the building is $ 900,000 and Seline's book value is $ 750,000.
3) The building has an estimated economic life of 10 years, with no residual value. Dionne uses straight-line depreciation for all its depreciable assets.
4) At the termination of the lease, title to the building will transfer to the lessee.
5) Dionne's incremental borrowing rate is 11%. Seline Inc. set the annual rental to ensure a 10% rate of return. The lessor's implicit rate is known to Dionne.
6) The yearly lease payment includes $ 3,000 executory costs related to taxes on the property.
From the lessor's viewpoint, what type of lease is this?

Question

Quizplus · Accepted Answer

This lease is classified as a sales-type lease from the lessor's viewpoint because title to the building transfers to the lessee at the end of the lease term, and the lease term covers the entire economic life of the asset. Additionally, the collectibility of lease payments is reasonably assured, and no significant uncertainties surround the amount of unreimbursable costs to be incurred by the lessor. These factors align with the criteria for a sales-type lease under accounting standards for private enterprises (ASPE).