Corinth Co. leased equipment to Athens Corporation for an eight-year period, at which time possession of the leased asset will revert back to Corinth. The equipment cost Corinth $16 million and has an expected useful life of 12 years. Its normal sales price is $22.4 million. The present value of the minimum lease payments for both the lessor and lessee is $20.4 million. The first payment was made at the inception of the lease. Collectibility of the remaining lease payments is reasonably assured, and Corinth has no material cost uncertainties. How should Athens classify this lease? Why?
Answer:
This is capital lease
Explaination
Explanation
The lease is a capital lease to Athens
Here present value of the minimum lease payments ($20.4 million) which is greater than 90% of the fair value of the asset
=90% x $22.4 million
= $20.16 million
