Textbook Problem

Next Level Keller Corporation (the lessee) entered into a general equipment lease with Hallo Company (the lessor) on January 1 of Year 1. Use the following information to decide whether this lease qualifies as an operating or finance lease for Keller, and give an explanation using the five classification criteria.

1. 1. The equipment reverts back to the lessor at the end of the lease, and there is no bargain purchase option.
2. 2. The lease term is 8 years and requires annual payments of $10,000 at the beginning of each year.
3. 3. The fair value of the equipment at lease inception is $100,000. Assume that the present value of lease payments discounted at a 10% interest rate is $58,684.19.
4. 4. The equipment has an estimated economic life of 20 years and has zero residual value at the end of this time.