Question

Star Company has entered into a 3-year lease agreement with Bell Corp. (lessor) for the use of 10 new commercial copy machines. The present value (PV) of the sum of the lease payments is $72,000. The total fair value of the machines on the lease commencement date is $120,000. An option to purchase the machines is not part of the lease agreement, and the copy machines will be returned to Bell at the end of the lease period. The machines are not specialized, and Bell will be able to lease or sell the leased machines after they are returned. The estimated useful life is 7 years. The residual value of $6,500 per machine is not guaranteed by Star or by a third party. It is probable that all lease payments will be collected. How should the lease be classified by the lessor?

Answer 1

Answer:

Operating lease

Explanation:

An operating lease is basically a lease contract that allows the lessee to use the assets but it doesn't transfer any ownership rights. It is like renting a house, you can use it as long as pay the rent, but the house isn't yours. Operating leases are not included in the balance sheet, while financial leases are.

In this case, Star Company may use the copy machines but it must return them in three years.