Suppose Your Firm Is Planning on Obtaining $500,000 of New

question 19

Multiple Choice

Suppose your firm is planning on obtaining $500,000 of new equipment using a four-year fair market value lease,and the equipment has a remaining useful life of 7 years.If the monthly lease payments are $11,500 and the appropriate discount rate is 7% APR with monthly compounding,will the lease be classified as an operating lease or a finance lease for the lessee?

• A)Finance lease,because the title to the property transfers to the lessee at the end of the lease term.
• B)Finance lease,because the present value of the minimum lease payments at the start of the lease is substantially all 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 substantially all of the asset's fair value.
• D)Operating lease,because the lease term is for the major part of the estimated economic life of the asset.
• E)Finance lease,because the lease term is for the major part of the estimated economic life of the asset.

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