Exhibit 20-5 The Baltimore, Inc. entered into a five-year lease with the Waugh Chapel Company on January 1, 2014. Baltimore, the lessor, will require that five equal annual payments of $25,000 be made at the beginning of each year. The first payment will be made on January 1, 2014. The lease contains a bargain purchase option price of $12,000, which the lessee may exercise on December 31, 2018. The lessee pays all executory costs. The cost of the leased property and its normal selling price are $95,000 and $118,236, respectively. Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease. Present value factors for a 7% interest rate are as follows:
-Refer to Exhibit 20-5. If Baltimore requires a 7% annual return, the lease should be classified as a(n)

Question

Exhibit 20-5 The Baltimore, Inc. entered into a five-year lease with the Waugh Chapel Company on January 1, 2014. Baltimore, the lessor, will require that five equal annual payments of $25,000 be made at the beginning of each year. The first payment will be made on January 1, 2014. The lease contains a bargain purchase option price of $12,000, which the lessee may exercise on December 31, 2018. The lessee pays all executory costs. The cost of the leased property and its normal selling price are $95,000 and $118,236, respectively. Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease. Present value factors for a 7% interest rate are as follows: 
-Refer to Exhibit 20-5. If Baltimore requires a 7% annual return, the lease should be classified as a(n)

Quizplus · Accepted Answer

To classify the lease, we need to determine whether it is an operating lease, a direct financing lease, or a sales-type lease. The lease meets the criteria for a sales-type lease because the cost of the leased property is $95,000, and the present value of the lease payments is $108,124. Since the fair value of the leased property is $118,236, the lease also meets the criteria for a sales-type lease with a profit. Therefore, the lease should be classified as a sales-type lease.

Exhibit 20-5 the Baltimore, Inc