Each of the independent situations below describes a lease requiring annual lease payments of $10,000. For each situation, determine the appropriate lease classification by the lessee and indicate why.

Lease term = 4

Asset useful life = 6

Asset's FV = $44,000

Bargain Purchase = No

Annual Lease Payment = Begining

Lessor's implicit rate = 5%

Lessee's incremental borrow rate = 5%

Lease term = 4

Asset useful life = 5

Asset's FV = $43,000

Bargain Purchase = Yes

Annual Lease Payment = End

Lessor's implicit rate = 6%

Lessee's incremental borrow rate = 5%

Does the agreement specify that ownership of the asset transfers to the lessee? NO

Does the agreement contain a bargain purchase option? NO

Is the lease termequal to75% or more of the expected NOeconomic life of the asset? NO (4 < (.75 X 6))

Is the present value of the minimum lease payments equalto or greater than 90% of the fair value of the asset? NO

10,000 X 3.72325

= (37233 < (.9 X 44,000))

Annuity due : n=4, i=5%.

Does the agreement specify that ownership of the asset transfers to the lessee? NO

Does the agreement contain a bargain purchase option? YES

Is the lease termequal to75% or more of the expected NOeconomic life of the asset? Yes (4 >.75X5)

Is the present value of the minimum lease payments equalto or greater than 90% of the fair value of the asset? NO

35,456 < (.9 X 43,000)

10,000 X 3.54595

Ordinary annuity

n=4, i = 5%.