My question is this: Is this a finance-type lease because the lease term is for

Question

My question is this: Is this a finance-type lease because the lease term is for more than 75% of the economic life of the underlying asset? I ask this question because of the entry for amortization expense. Normally, amortization for an operating lease would typically be the reduction in the lease liability (100,327), but here, SL seems to have been used to arrive at amortization expense. This being said, the probem states that the equipment will revert back to the lessor, suggesting an operating lease and here is where I start to question things. Can someone please clarify?

Thanks

No Date General Journal Debit Credit January 01, 2018 Right-of-use asset 594,552 Lease payable 594,552 December 31, 2018 118,910 2 Amortization expense Right-of-use asset 118,910 December 31, 2018 3 Interest expense 35,673 Lease payable 100,327

Explanation / Answer

The Lease is to be Classified as Financial lease as one condition for being Financial lease is that major part of the economic life of the asset, even if title is not transferred.

in the above mentioned case The lease term is 5 years and Economic Life is 6 years so it is cover major part of the Assets.

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