(Answered) Problemrefer to the facts below to determine whether the

Accounting

Problem

Refer to the facts below to determine whether the lease should be classified as a finance lease or an operating lease.

• There are 5 annual lease payments of $9,000 payable at the beginning of each year commencing on 1 July 2018.

• The carrying amount of the machine in the lessors book is $40,000• The current market selling value of the machine is $45,000

• The estimated economic life of the machine is 10 years, with a residual value of zero atthe end of its useful life

• The lease is non cancellable

• The unguaranteed residual value at the end of the lease is $20,730.

• The interest rate implicit in the lease is 15% p.a.

• The machine is to be returned to the lessor at the end of the lease term.

• The lessor is responsible for all the repair costs and insurance.

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