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:

Income Ratios

A set of financial metrics that compare a company's income to other aspects of its financial performance or condition.

Liquidation

The process of winding up a company's operations and distributing its assets to claimants, often during insolvency.

Noncash Assets

Resources that cannot be quickly turned into cash or are non-liquid, like land, machinery, and intellectual property rights.

Income Sharing

An arrangement where profits or revenues are distributed among stakeholders, partners, or employees, based on a predefined formula.