QUESTIONS 45 THROUGH 68 RELATE TO FINANCIAL STATEMENT ANALYSIS

58. Assume U.S. GAAP (generally accepted accounting principles) applies unless

otherwise noted.

On 1 January 2008 a company enters into a lease agreement to lease a piece of

machinery as the lessor with the following terms:

Annual lease payment due 31 December $50,000

Lease term 5 years

Estimated useful life of the machine 6 years

Estimated salvage value of the machine $0

Carrying value (cost) of leased asset $160,000

Implied interest rate on lease 8%

The firm is reasonably assured of the collection of the lease payments.

Which of the following best describes the classification of the lease on the

company’s financial statements for 2008?

A. Operating lease.

B. Sales type lease.

C. Direct financing lease.