Assume the following facts relating to a lease: Leased asset, new at inception of lease term.Estimated useful life, 14 years.
Lease term, 8 years; asset returns to lessor.
Interest rate implicit in the lease, 10 percent (known by lessee).Lessee's marginal borrowing rate, 12 percent.
Amount of each lease payment, $2,000.Lessor's cost of the leased asset, $15,164.
Market value of leased asset at inception of the lease term, $15,164 Lease payments are due at the end of each period.
From the perspective of the lessee, this lease should be classified as a(n):
A)operating lease.
B)finance lease.
C)sales-type lease.
D)direct financing lease.

Question

Quizplus · Accepted Answer

The lease should be classified as an operating lease because the lease term (8 years) is less than 75% of the asset's useful life (14 years), and the present value of lease payments does not cover substantially all of the fair value of the asset.

Assume the Following Facts Relating to a Lease: Leased Asset