USE THE FOLLOWING FACT SET TO ANSWER QUESTIONS 16 – 18: Nort…
USE THE FOLLOWING FACT SET TO ANSWER QUESTIONS 16 – 18: North Pole Real Estate Corp. signs an agreement on January 1, 2025, to lease a retail location to The Polar Expresso, a Christmas-themed Cafe. The following information relates to this agreement. The agreement requires equal annual rental payments of $28,335 to the lessor, beginning on January 1, 2025. The term of the non-cancelable lease is 3 years with no bargain purchase or renewal options. The building has an estimated economic life of 5 years. It is not a specialized asset. The fair value of the asset on January 1, 2025, is $88,000. The building will revert back to the lessor at the end of the lease term, at which time the building is expected to have a residual value of $7,000, none of which is guaranteed. The Polar Expresso uses the straight-line depreciation method for all buildings. The lessor’s implicit rate is 4% and is unknown to the lessee. The lessee’s incremental borrowing rate is 5%. 4%, 3 periods – PVF-AD 3, 4% = 2.88609; PVF of $1 3, 4% = 0.88900. 5%, 3 periods – PVF-AD 3, 5% = 2.85941; PVF of $1 3, 5% = 0.86384. QUESTION 16 –> The Polar Expresso will classify this as a Finance Lease. Perform all five lease classification tests and indicate which one(s) determine that this is a Finance lease rather than an Operating lease. Transfer of ownership Bargain purchase Lease Term / Economic Life Present value Alternate Use / Specialized asset