Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 20

Question

Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2018 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement: (a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $574,864 are due on January 1 of each year. (b) The fair value of the machine on January 1, 2018, is $1,600,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease. (c) Alt depreciates all machinery it owns on a straight-line basis. (d) Alt’s incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates. (e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful. From the viewpoint of Yates, what type of lease agreement exists?

A)Operating lease

B) Capital lease

C) Sales-type lease

D) Direct-financing lease

Explanation / Answer

1) The classifications of a lease by the lessee are

Solution: operating and finance leases.

Working: The classifications of a lease by the lessee are operating and capital lease

2) From the viewpoint of Yates, what type of lease agreement exists

Solution: Operating lease

Working: An operating lease refers to a contract that permits for the asset usage but does not convey rights of ownership of the asset

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