Question

On January 1, 2021, Sans Serif Publishers leased printing equipment from First LeaseCorp. First LeaseCorp purchased the equipment from CompuDec Corporation at a cost of $479,079. The lease agreement specifies six annual payments of $100,000 beginning January 1, 2021, the beginning of the lease, and at each December 31 from 2021 through 2025. The six-year lease term ending December 31, 2026, is equal to the estimated useful life of the equipment. First LeaseCorp routinely acquires electronic equipment to lease to other firms. The interest rate in these financing arrangements is 10%. 1) How should this lease be classified

Answer 1

The lease should be classified as a Finance or Capital Lease.

Step-by-step explanation:

For Sans Serif to recognize a lease arrangement as a Capital Lease, the lease term will take up a significant part of the asset’s useful economic life, among other conditions. In this case, the economic life of the asset is six years, and the lease term lasts six years. This lease cannot be classified as an operating lease, with the lease payments treated as an expense instead of as a repayment of a liability for a recognized asset.