Assume that Speery agrees to lease a new machine from Leery on January 1,2017,for $30,000 per year,paid in advance (i.e.,at the beginning of the year).The lease term is 10 years and the asset's useful life is 8 years.There is no bargain purchase option.The unguaranteed residual value is $10,000.Which statement is correct?
A) The unguaranteed residual will be recorded on Speery's balance sheet.
B) The lease is an operating lease.
C) The lease is a finance lease.
D) More information is needed to determine the accounting treatment.

Question

Quizplus · Accepted Answer

Since the lease term is equal to 80% of the useful life of the asset (8/10), and the present value of the lease payments equals or exceeds 90% of the fair value of the asset, the lease meets the criteria for a finance lease. Therefore, Speery will record the leased asset and the lease liability on their balance sheet. The unguaranteed residual value will also be included in the calculation of the lease liability.

Assume That Speery Agrees to Lease a New Machine from Leery