On January 1, 2020, Marlene Corp. enters into an agreement with Dietrich Rentals Inc. to lease a machine from them. Both corporations adhere to ASPE. The following data relate to the agreement:
1) The term of the non-cancellable lease is three years with no renewal option. Payments of $ 271,622 are due on December 31 of each year.
2) The fair value of the machine on January 1, 2020, is $ 700,000. The machine has a remaining economic life of 10 years, with no residual value. The machine reverts to the lessor upon the termination of the lease.
3) Marlene depreciates all its machinery on a straight-line basis.
4) Marlene's incremental borrowing rate is 10%. Marlene does not have knowledge of the 8% implicit rate used by Dietrich.
5) Immediately after signing the lease, Dietrich discovers that Marlene is the defendant in a lawsuit that is sufficiently material to make collectibility of future lease payments doubtful.
From Dietrich's viewpoint, what type of lease is this?
A) operating lease
B) finance lease
C) manufacturer or dealer lease
D) other finance lease

Question

Quizplus · Accepted Answer

The lease is classified as an operating lease from Dietrich's viewpoint because collectibility of future lease payments is doubtful, which prevents it from being classified as a finance lease under ASPE.