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Lease classification

Lease term 3 years, no renewal option

Economic life of the copier 5 years

Purchase option None

Annual lease payments $500, which includes Lessor maintenance for the term of the
lease.

Lessor Corp normally leases the same copier for $475 per year
and offers a maintenance contract for $75 per year.

Payment date Annually on January 1

Lessee Corp’s incremental 5.5%
borrowing rate
The rate Lessor Corp charges Lessee Corp in the lease is not
readily determinable by Lessee Corp.

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

□ The fair value of the copier is $2,000; Lessee Corp does
not guarantee the residual value of the copier at the end
of the lease term
□ Lessee Corp pays $100 in legal fees related to the
negotiation of the lease, which are treated as initial direct
costs

□ Lessor Corp does not provide any incentives

Lessee Corp has not made an accounting policy election to not separate the lease and nonlease
components for this class of asset.

How should Lessee Corp classify the lease?

Analysis

Lessee Corp should first separate the contract into its lease and nonlease components. Per ASC 842-
10-15-33, a lessee should allocate the consideration in a contract to the lease and nonlease components
based on their relative standalone price, as shown here.

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