The Deluxe Corporation has just signed a 120-month lease on an assest with a 15-

Question

The Deluxe Corporation has just signed a 120-month lease on an assest with a 15-year life. The minimum lease payments are 2,000 per month (24,000 per year) and are to be discounted back to the present at a 9 percent annual discount rate. The estimated fair value of the property is 200,000. Use Appendix D.

a) Calculate the lease period as a percentage to the estimated life of the leased property. (Round your answer to the nearest whole percent.)

b) Calculate the present value of lease payments as a percentage to the fair value of the property. (Round PV Factor to 3 decimal places. Round your intermediate and final answer to 1 decimal place.)

c) Should the lease be recorded as a capital lease or an operating lease? it's either an operating lease or capital lease.

Explanation / Answer

number of years = 120/12 = 10 years

percentage of estimated life of leased property = 10/15 = 0.6667 = 66.67%

as per the table in the appendix D PV @7%,10 years = 6.418

so present value of lease payment = 24,000 * 6.418 = 154,032

fair value of the property is 200,000

percentage of lease payment = 154,032/200,000 = 0.77016 = 77.016 %

since the present values is less than 90% it is an operating lease

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