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Colfax Corporation enters into an agreement with Reynolds Rentals on January 1, 2014 for the purpose of leasing a machine to be used in its manufacturing operations. The term of the noncancelable lease is 5 years with no renewal option. Payments of $200,000 are due on December 31 of each year. The fair value of the machine on January 1, 2014, is $800,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon termination of the lease. Colfax Corporation's incremental borrowing rate is 10% per year. Colfax does not have knowledge of the 8% implicit rate used by Reynolds. The factor for the present value of an ordinary annuity of 1, for 5 periods at 10% is 3. 79079. The factor for the present value of an ordinary annuity of 1, for 5 periods at 8% is 3. 99271. What type of lease is this from Colfax Corporation's point of view?

a) Sales-type lease

b) Direct-financing lease

c) Capital lease

d) Operating lease

Accounting Basics, Accounting

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