Exhibit 20-5 the Baltimore, Inc. Entered into a Five-Year Lease with the with the Waugh

Exhibit 20-5
The Baltimore, Inc. entered into a five-year lease with the Waugh Chapel Company on January 1, 2016. Baltimore, the lessor, will require that five equal annual payments of $25,000 be made at the beginning of each year. The first payment will be made on January 1, 2016. The lease contains a bargain purchase option price of $12,000, which the lessee may exercise on December 31, 2020. The lessee pays all executory costs. The cost of the leased property and its normal selling price are $95,000 and $118,236, respectively. Collectibility of the future lease payments is reasonably assured, and the lessor does not expect to incur any future costs related to the lease. Present value factors for a 7%
-Refer to Exhibit 20-5. If Baltimore requires a 7% annual return, how should the lease be classified?

A) operating lease
B) direct financing lease
C) sales-type lease
D) leveraged lease

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