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Lease classification

Lease term 5 years, no renewal option

Economic life of the equipment 6 years

Purchase option None

Annual lease payments $1,100
Payment date Annually on January 1

Lessee Corp’s incremental 7%
borrowing rate
The rate Lessor Corp charges Lessee Corp in the lease is not
readily determinable by Lessee Corp.

Other □ Title to the asset remains with Lessor Corp upon lease
expiration

□ The fair value of the equipment is $5,000; Lessee Corp
does not guarantee the residual value of the equipment at
the end of the lease term
□ Lessee Corp pays for all maintenance of the equipment
separate from the lease
□ There are no initial direct costs incurred by Lessee Corp

□ Lessor Corp does not provide any incentives

How should Lessee Corp classify the lease?

Analysis

Lessee Corp should assess the lease classification using the criteria outlined in ASC 842-10-25-2 and
ASC 842-10-25-3.

Criteria Analysis

Transfer of ownership Ownership of the asset does not transfer to
Lessee Corp by the end of the lease term.

Purchase option which the lessee is reasonably The lease does not contain a purchase option.
certain to exercise

Lease term is for the major part of the remaining Lessee Corp is utilizing the asset for
economic life of the asset approximately 83% of the economic life of the
asset (5-year lease / 6-year economic life),
which is deemed to be a major part.

Sum of present value of lease payments and any The present value of the lease payments
residual value guarantee by the lessee amounts to (discounted at Lessee Corp’s incremental
borrowing rate of 7%) is $4,825.

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