Question

Zen’s Manufacting makes koto tone rings for popular kotomakers. To expand capacity, the company decided to...

Zen’s Manufacting makes koto tone rings for popular kotomakers. To expand capacity, the company decided to lease a new machine used in tone ring turning and plating from SJP. The machine is similar to that used by other tone ring makers. The following is information about the lease terms:

Lease Payment -                        $75,000 semi-annually at the beginning of each period

Lease Term -                               4 years with semi-annual payments, beginning June 30, 2019

Residual Value -                          $0

Bargain Purchase Option -        No

Expected Life of Machine -      6 Years

Implicit Interest Rate -               10%

Fair Value and cost of Asset -   $550,000

How should this lease be classified by the lessee and lessor?

  • Type of Tests (5 of them)
  • Is type of lease for lessee:
  • Is type of lease for lessor:
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Answer #1

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lease classified by the lessee and lessor This is Operating lease
Test
Present value 508978
Fair Value 550000
Percentage 92.54%
No purchasing option
life of lease not coverd substantial 66.67%
Lease period 4 years
Life of machine 6 years
type of lease for lessee Operating lease
type of lease for lessor Operating lease
Working
Period Semi annualy payment Discount Factor Present Value
1 75000 1 75000.00
75000 0.9524 71428.57
2 75000 0.9070 68027.21
75000 0.8638 64787.82
3 75000 0.8227 61702.69
75000 0.7835 58764.46
4 75000 0.7462 55966.15
75000 0.7107 53301.10
508978.00
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