Use the table for the question(s) below.
Luther Industries currently has the following balance sheet (in Thousands of dollars):
Luther is about to add a new fleet of delivery trucks. The price of the fleet is $1.5 million.
-Suppose the lease is a five-year fair market value lease, and the trucks have a remaining useful life of 8 years. If the monthly lease payments are $25,000 and the appropriate discount rate is 6% APR with monthly compounding, will the lease be classified as an operating lease or a capital lease for the lessee?
A) Capital lease, because the title to the property transfers to the lessee at the end of the lease term.
B) Capital lease, because the present value of the minimum lease payments at the start of the lease is 90% or more of the asset's fair value.
C) Operating lease, because the present value of the minimum lease payments at the start of the lease is less than 90% of the asset's fair value.
D) Operating lease, because the lease term is more than 75% of the estimated economic life of the asset.

Question

Use the table for the question(s) below.
Luther Industries currently has the following balance sheet (in Thousands of dollars):
  Luther is about to add a new fleet of delivery trucks. The price of the fleet is $1.5 million.
-Suppose the lease is a five-year fair market value lease, and the trucks have a remaining useful life of 8 years. If the monthly lease payments are $25,000 and the appropriate discount rate is 6% APR with monthly compounding, will the lease be classified as an operating lease or a capital lease for the lessee?
A) Capital lease, because the title to the property transfers to the lessee at the end of the lease term. 
B) Capital lease, because the present value of the minimum lease payments at the start of the lease is 90% or more of the asset's fair value. 
C) Operating lease, because the present value of the minimum lease payments at the start of the lease is less than 90% of the asset's fair value. 
D) Operating lease, because the lease term is more than 75% of the estimated economic life of the asset.

Quizplus · Accepted Answer

C) The PV of the monthly lease payments is 25,000 × (1 + 1/0.005(1 - (1/1.005⁵⁹)) = $1,299,604.71 $1,299,604.71 /1,500,000 = 86.64% < 90%.

Use the Table for the Question(s) Below