Ford signs a non-cancelable 8-year equipment lease with Ray. The lease has an implicit rate of return of 10% to Ray, the lessor. This rate is known to Ford. Ray's incremental borrowing rate is 8.5%. Ford has a 9% incremental borrowing rate. Ray believes that the equipment has a 10-year service life but has reason to suspect that a major overhaul might be required in the fifth to seventh year. Since this is the first year of the equipment's production, Ray warrants equipment for eight full years anyway.
-On Ford's books,this lease is treated as a/an

Question

Quizplus · Accepted Answer

This lease qualifies as a capital lease under the criteria set by FASB. The lease term is for a major part of the equipment's useful life (8 out of 10 years), and the present value of lease payments exceeds 90% of the equipment's fair market value. Additionally, the lease contains a bargain purchase option, which allows the lessee to purchase the equipment at the end of the lease term for a nominal price. Therefore, the lease should be recorded as a capital lease on Ford's books and reflected as an asset and liability.

Ford Signs a Non-Cancelable 8-Year Equipment Lease with Ray