Peridot Leasing Entered into an Agreement to Lease Warehouses to AMC

Peridot Leasing entered into an agreement to lease warehouses to AMC Foods.
a. The agreement calls for ownership of the warehouses to be transferred to AMC Foods at the end of the lease term.
b. The fair value of the warehouses is expected to be $400,000 at the end of the lease term. AMC has the option to purchase the warehouses at the end of the lease term for $80,000.
c. The warehouses have a useful life of 10 years and the term of the lease is 4 years.
d. The present value of the lease payments is $4,400,000 and the fair value of the leased warehouses is $5,000,000.
e. The warehouses were manufactured to meet specifications provided by AMC to optimize its unique food delivery processes.
Required: For each independent scenario listed (a-e), indicate whether AMC would classify the lease as an operating lease or finance lease. Assume the lease agreement has not met any of the other indicators of a finance lease. Provide brief explanations.

Correct Answer:

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a. Transfer of ownership is one of five ...

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