Use the Table for the Question(s) Below

question 33

Multiple Choice

Use the table for the question(s) below.
Luther Industries currently has the following balance sheet (in Thousands of dollars) :
Luther is about to add a new fleet of delivery trucks. The price of the fleet is $1.5 million.
-Suppose the lease is a five-year fair market value lease, and the trucks have a remaining useful life of 8 years. If the monthly lease payments are $25,000 and the appropriate discount rate is 6% APR with monthly compounding, will the lease be classified as an operating lease or a capital lease for the lessee?

• A) Capital lease, because the title to the property transfers to the lessee at the end of the lease term.
• B) Capital lease, because the present value of the minimum lease payments at the start of the lease is 90% or more of the asset's fair value.
• C) Operating lease, because the present value of the minimum lease payments at the start of the lease is less than 90% of the asset's fair value.
• D) Operating lease, because the lease term is more than 75% of the estimated economic life of the asset.

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Definitions:

Required Rate Of Return

The minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular project or investment.

Tax Rate

The percentage rate at which the government taxes an individual’s or corporation’s income.

Sliding Clutches

Sliding clutches are components in a transmission that allow for the engagement and disengagement of gears during the gear shifting process.

Twin-countershaft

A design feature in transmissions where two countershafts work in parallel to distribute the load and allow for more gear ratios, enhancing performance and durability.