Sanders Fashion Company enters into a lease arrangement with Highpoint Leasing for 5 years. Sanders agrees to pay 4% of its net sales as a variable lease payment. Sanders does not pay any fixed payments. Sanders is a highly successful company that has achieved over $1,000,000 in net sales over the last 7 years. Both Sanders and Highpoint forecast that net sales will be a much greater amount than $1,000,000 in subsequent years. As a result, it is highly certain that Sanders will make payments of at least $40,000 ($1,000,000 × .04) each year. What is the lease payment amount Sanders should use to record its right-of-use asset?

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Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.