Kemba Corporation has acquired equipment with a fair market value of $ 145,000 on January 1, 2021 by engaging in a 5-year lease transaction that requires annual lease payments of $ 24,000 beginning January 1, 2021. The leased asset will revert back to the lessor after the lease term. Kemba has the option to purchase the equipment at the end of the lease term at the equipment's fair market value at that time. The economic life of the asset is 8 years and the present value of the minimum lease payments is $ 100,077.
Instructions
Analyze the details of this transaction and determine whether it should be classified as an operating or a finance lease in accordance with IFRS.

Question

Quizplus · Accepted Answer

The Answer of Kemba Corporation has acquired equipment with a fair market value of $ 145,000 on January 1, 2021 by engaging in a 5-year lease transaction that requires annual lease payments of $ 24,000 beginning January 1, 2021. The leased asset will revert back to the lessor after the lease term. Kemba has the option to purchase the equipment at the end of the lease term at the equipment's fair market value at that time. The economic life of the asset is 8 years and the present value of the minimum lease payments is $ 100,077.
Instructions
Analyze the details of this transaction and determine whether it should be classified as an operating or a finance lease in accordance with IFRS.

Kemba Corporation Has Acquired Equipment with a Fair Market Value