Exhibit 21-5 the Chicago, Inc - Refer to Exhibit 21-5

question 86

Multiple Choice

Exhibit 21-5 The Chicago, Inc.entered into a five-year lease with the Urbana Company on January 1, 2010.Chicago, the lessor, will require that five equal annual payments of $25, 000 be made at the beginning of each year.The first payment will be made on January 1, 2010.The lease contains a bargain purchase option price of $12, 000, which the lessee may exercise on December 31, 2014.The lessee pays all executory costs.The cost of the leased property and its normal selling price are $95, 000 and $118, 236, respectively.Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease.Present value factors for a 7% interest rate are as follows:
$\begin{array}{llr} \text { Present value of \( \$ 1 \) for \( n=1 \) } &0.934579\\ \text { Present value of \( \$ 1 \) for \( n=5 \) } &0.712986\\ \text { Present value of an ordinary annuity for \( n=5 \) } &4.100197\\ \text { Present value of an annuity due for \( n=5 \) } &4.387211\\\end{array}$


- Refer to Exhibit 21-5.If Chicago requires a 7% annual return, the lease should be classified as a(n)

• A)operating lease
• B)direct financing lease
• C)sales-type lease
• D)leveraged lease

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Definitions:

Corporate Form

The legal structure of a business recognized as a separate entity from its owners, providing limited liability.

Owners

Individuals or entities that legally possess property, businesses, or assets.

Sole Proprietorship

An organizational model in which a sole proprietor is in charge of the entire business, including its assets and debts.

Shares

Units of ownership interest in a corporation or financial asset that provide a proportionate claim on the company's earnings and assets.