Use the Following Information for Questions 54 Through 59

question 64

Multiple Choice

Use the following information for questions 54 through 59. (Annuity tables on page 21-25.)
On January 1, 2015, Yancey, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the beginning each year.
(b) The fair value of the building on January 1, 2015 is $4,000,000; however, the book value to Holt is $3,300,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Yancey depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will be transferred to the lessee.
(e) Yancey's incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Yancey, Inc.
(f) The yearly rental payment includes $10,000 of executory costs related to taxes on the property.
-If the lease were nonrenewable, there was no purchase option, title to the building does not pass to the lessee at termination of the lease and the lease were only for eight years, what type of lease would this be for the lessee?

• A) Sales-type lease
• B) Direct-financing lease
• C) Operating lease
• D) Capital lease

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Definitions:

Conditional Sale Contract

A sales agreement that transfers the title of an item to the buyer only after certain conditions, typically payment completion, are met.

Compounded Monthly

Interest calculation method where interest is added to the principal every month, affecting subsequent interest calculations.

Ordinary Annuity

A series of equal payments made at fixed intervals for a specified period of time, with the payments typically occurring at the end of each period.

Compounded Monthly

Interest calculated on the principal and previously earned interest every month.