Your ﬁrm is considering leasing a new computer.The lease lasts for 9 years.The lease calls for 10 payments of £1,000 per year with the ﬁrst payment occurring immediately.The computer would cost
£7,650 to buy and would be straight-line depreciated to a zero salvage over 9 years.The actual
Salvage value is negligible because of technological obsolescence.The ﬁrm can borrow at a rate of
8%)
The corporate tax rate is 30%.This lease would be classiﬁed as a(n):
A)operating lease because the asset will be obsolete.
B)operating lease because there is not amortization.
C)leveraged lease because it is being ﬁnanced.
D)capital lease because the lease life is greater than 75% of the economic life.
E)sale and leaseback because the company gets full use of the asset.

Question

Quizplus · Accepted Answer

The lease should be classified as a capital lease because its lease life is greater than 75% of the economic life of the asset. The economic life of the computer is 9 years (its lease life), and it will be fully depreciated over this time period. The lease payments, being substantially all of the asset's fair value, would also indicate a capital lease classification.

Your ﬁRm Is Considering Leasing a New Computer