Each of the four 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. Situation
1 2 3 4
Lease term (years) 4 4 4 4
Asset’s useful life (years) 6 5 6 6
Asset’s fair value $44,000 $43,000 $41,000 $39,000
Bargain purchase option? No Yes No No
Annual lease payments Beg. of yr. End of yr. Beg. of yr. End of yr.
Lessor’s implicit rate (known by lessee) 5% 6% 5% 6%
Lessee’s incremental borrowing rate 5% 5% 5% 5%