Lukawitz Industries leased non-specialized equipment to Seminole Corporation for a four year period, at which time possession of the leased asset will revert back to Lukawitz. The equipment cost Lukawitz $4 million and has an expected useful life of six years. Its normal sales price is $5.6 million. The present value of the lease payments for both the lessor and lessee is $5.2 million. The first payment was made at the beginning of the lease. How should this lease be classified (a) by Lukawitz Industries (the lessor) and (b) by Seminole Corporation (the lessee)? Why?
Lukawitz Industries leased non-specialized equipment to Seminole Corporation for a four year period, at which time possession of the leased asset will revert back to Lukawitz. The equipment cost Lukawitz $4 million and has an expected useful life of six years. Its normal sales price is $5.6 million. The present value of the lease payments for both the lessor and lessee is $5.2 million. The first payment was made at the beginning of the lease. How should this lease be classified (a) by Lukawitz Industries (the lessor) and (b) by Seminole Corporation (the lessee)? Why?
Solution Summary: The author explains the criteria for defining the lease as a finance lease or an operating lease.
Lukawitz Industries leased non-specialized equipment to Seminole Corporation for a four year period, at which time possession of the leased asset will revert back to Lukawitz. The equipment cost Lukawitz $4 million and has an expected useful life of six years. Its normal sales price is $5.6 million. The present value of the lease payments for both the lessor and lessee is $5.2 million. The first payment was made at the beginning of the lease. How should this lease be classified (a) by Lukawitz Industries (the lessor) and (b) by Seminole Corporation (the lessee)? Why?
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