Minnetonka Company leases an asset. Information regarding the lease:
Fair value of the asset: $400,000.
Useful life of the asset: 6 years with no salvage value. Lease term is 5 years. Annual lease payments are $60,000
Implicit interest rate: 11%.
Minnetonka can purchase the asset at the end of the lease period for $50,000.

What type of lease is this?

The options are given below:

A. Short term.

B. Operating.

C. Long

D. Finance.

The correct option is D. Finance.

Explanation: A finance lease is the kind of lease in which a finance company is the legal owner of the asset throughout the duration of the lease, while the lessee has both operating control over the asset, and some share of the economic risks and returns from the change in the valuation of the underlying asset.

In a finance lease agreement, ownership of the property is transferred to the lessee at the end of the lease term.

D) Finance.

Explanation:

In a financial lease, the lessee must include the leased asset in its balance sheet. Even though the title of the leased asset is transferred after the lease term is over, the lessee must consider the leased asset as its own. The lessee even has to depreciate the leased asset in the same way as it treats similar assets owned by the company.

While the lessee depreciates the leased assets, the lessor must amortize them.

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