On Janurary 1, 2014, LMN company leased equipment from PQR company. The followin

Question

On Janurary 1, 2014, LMN company leased equipment from PQR company. The following information pertains:

Cost of the leased equipment to PQR company 1,000,000.

Fair value of the leased equipment as of Janurary 1, 2014: 1,250,000.

Lease Term: 6 years

Lessor's interest rate implicit in the lease: 6%

Lessee's incremental borrowing rate: 7%

Barain purchase option: none

Guaranteed residual value: None

Paments: Made on Janurary 1 of each year begining 2014.

Other matters: Collectibility of the payments from the lessee is reasonably predictiable and no important uncrertainties surround the amount of unreimbursable costs yet to be incurred by the lessor.

The PQR Company, this is a:

A.operating lease

B.direct financing lease

C. indirect financing lease

D. Sales-type lease

Explanation / Answer

THIS IS A OPERATING LEASE BECAUSE THE TITLE/OWNERSHIP REMAINS WITH THE LESSOR AFTER THE LEASE TERM AND THERE IS NO PURCHASE OPTION.

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