Use the Following Information for Questions

question 27

Multiple Choice

Use the following information for questions
On January 1, 2016, Yancey, Inc.signs a 10-year noncancelable lease agreement to lease a storage building from Holt Warehouse Company.The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the beginning of each year.
(b) The fair value of the building on January 1, 2016 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)Finance lease

---

Definitions:

Merchandise

Goods that are bought and sold as part of business operations, typically in a retail or wholesale setting.

Credit

Credit refers to the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.

Return of Merchandise

This is when customers return purchased goods to the seller, usually due to defects, dissatisfaction, or the desire for an exchange or refund.

Perpetual Inventory System

An inventory management method that tracks the sale and purchase of inventory in real time to ensure accurate stock levels.