Use the Following Information for Questions 75 Through 80

Use the following information for questions 75 through 80. (Annuity tables on page 21-25.)
Alt Corporation enters into an agreement with Yates Rentals Co. on January 1, 2015 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option. Payments of $287,432 are due on January 1 of each year.
(b) The fair value of the machine on January 1, 2015, is $800,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt's incremental borrowing rate is 10% per year. Alt does not have knowledge of the 8% implicit rate used by Yates.
(e) Immediately after signing the lease, Yates finds out that Alt Corp. is the defendant in a suit which is sufficiently material to make collectibility of future lease payments doubtful.
-From the viewpoint of Yates, what type of lease agreement exists?

A) Operating lease
B) Capital lease
C) Sales-type lease
D) Direct-financing lease

Correct Answer:

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