Johnson Ltd Enters into a Lease Agreement with Peterson Ltd

Johnson Ltd enters into a lease agreement with Peterson Ltd under the following conditions: $$\begin{array} { | l | r | l | } \hline \text { Duration of lease } & 10 \text { years } & \\\hline \text { Life of leased asset } & 12 \text { years } & \\\hline \text { Unguaranteed residual } & \$ 8,000 & \\\hline \text { Lease payment } & \$ 6,500 & \text { at lease inception } \\\hline \text { Annual lease payments (in arrears) } & \$ 7,000 & \text { per year (10 payments) } \\\hline\end{array}$$ The lease may be cancelled only with the permission of the lessor.If the rate of interest implicit in the lease is 10%,what is the fair value of the asset at the inception of the lease,and is the lease a finance or operating lease?

A) $56 745, finance lease
B) $52 596, operating lease
C) $56 745, operating lease
D) $52 596, finance lease

Correct Answer:

Verified

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