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Question: Wright Company leases an asset for five years on December 31, 2000. Annual lease cost of S10,000 1S payable on each: December 31 beginning" , with the year 200Lln addition to the annual lease cost, the lease contract calls lor a guaranteed residual value ofS:3,OOO.The asset has an economic of seven years. Weigel's intrarenal borrowing rate is 8 percent. The asset has an acquisition cost of $43,000. There are no purchase options.

Required: a. As things no stand, is this a capital lease an operating lease? Show figures.

b. What can Wright do to convert this lease to an operating lease? Explain and show figures.

c. Will lessee and lessors accounting for this lease be symmetrical (capital lease for both lessor and lessee or operating lease for both lessor and lessee)? Explain.

d. Do you think that Wrights action in (b) represents a loophole to avoid capitalization or it is a useful pan of the present leasing rules? Explain.

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Accounting Basics, Accounting

Category:- Accounting Basics
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