Tropical Products Inc. is in the process of negotiating a lease of equipment with a...
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Tropical Products Inc. is in the process of negotiating a lease of equipment with a fair value of $50,000, and it must determine the proper lease classification. The following table describes four scenarios under negotiation.
Option 1Option 2Option 3Option 4Ownership transferNoNoNoNoPurchase optionNoNoNo$10,000 purchase option, considered a discounted price.Length of lease term, in years4343Economic life of equipment, in years5555No alternative use of equipment at lease endNoNoNoNoAnnual lease payment$11,000$11,000$11,000$11,000Guaranteed residual valueNoNo$15,000NoImplicit rate of leaseUnknown to lesseeUnknown to lessee8.4%Unknown to lesseeIncremental borrowing rate of lessee8%8%8%8%Payment typeBeginning of periodBeginning of periodBeginning of periodEnd of period
Required For each of the four options, determine whether the lessee would classify the lease as operating or nance.
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