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Lessor Inc. leased equipment with a fair value of $45,000 and a carrying value of $37,000, under the following terms:
Lease Terms
Ownership of equipment transfers to lessee at lease-end No
Lease includes a purchase option No
Length of lease term in years 6
Economic life of the equipment in years 10
Alternative use of the equipment at lease-end Yes
Annual lease payment, first payment due at the end of the year $8,750
Guaranteed residual value by an insurance company $9,000
Lessor Inc.s implicit interest rate 8.7412%
How would Lessor Inc. classify the lease? Assume that the company considers 90% of fair value to be substantially all of fair value.
Select one: a. Direct financing lease b. Finance lease c. Operating lease d. Sales-type lease
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