Morey Corporation leases a tractor from Equity Leasing with a five-year non-cancelable lease on January 1, 2014 under the following terms:
1. Five payments of $26,379.74 (a 9% implicit rate, known to Morey) due at the end each year.
2. The payments were calculated based on the fair value (which is also the book value for Equity) of the tractor.
3. The lease is nonrenewable and the tractor reverts to Equity at the end of the lease term.
4. The tractor has a six-year economic life.
5. Morey has an excellent credit rating.
6. Equity offers no warranty on the tractor other than the manufacturer's two-year warranty that is handled directly with the manufacturer.
-For Equity Leasing,this is treated as a/an
A)operating lease.
B)ordinary capital lease.
C)direct financing capital lease.
D)sales-type capital lease.

Question

Quizplus · Accepted Answer

This lease can be classified as a direct financing capital lease because Morey Corporation is essentially financing the purchase of the equipment through the lease payments. The lease term is for five years, which is greater than 75% of the tractor's economic life (six years), the lease payments are based on the fair value (or book value) of the tractor, and the lessee has an excellent credit rating. There is also no bargain purchase option or transfer of ownership at the end of the lease term.

Morey Corporation Leases a Tractor from Equity Leasing with a Five-Year