CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

On 1 January 2014 a company enters into a lease agreement to lease a piece of machinery as the lessor with the following terms:

Annual lease payment due 31 December: $50,000
Lease term: 5 years
Estimated useful life of the machine: 6 years
Estimated salvage value of the machine: $0
Carrying value (cost) of leased asset: $160,000
Implied interest rate on lease: 8%
The firm is reasonably assured of the collection of the lease payments.

Which of the following best describes the classification of the lease on the company's financial statements for 2014?
A. Operating lease
B. Direct financing lease
C. Sales-type lease
Explanation: It is a sales-type lease: the lease period covers more than 75% of the asset's useful life (5/6=83.3%) and the asset is on the company's books at less than the present value of the lease payments ($199,635) (PMT = $50,000, N=5, i=8%). The firm must have acquired or manufactured the asset if it is recorded at less than the present value of the lease payments.

User Contributed Comments 2

User Comment
nmech1984 why not direct finance lease?
nmech1984 ecause PV of lease payments<Cost?
You need to log in first to add your comment.