Question 10.5,ch10,ca - Question 10.5 Accounting for a...

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Question 10.5 Accounting for a finance lease by the lessee Florida Sun Ltd has entered into a lease arrangement to acquire the right to use an item of equipment. The terms of the lease are as follows: Inception of the lease and the beginning of the lease term 31 December 2015 Termination date of the lease 31 December 2020 Period of the lease 5 years Guaranteed residual value at end of the lease term $2 715 Interest rate implicit in the lease 15% Lease rental amount payable annually in advance $30 000 Fair value of leased asset $125 000 The lease is non-cancellable. Florida Sun Ltd is responsible for maintaining and insuring the equipment. Florida Sun Ltd returns the equipment to the lessor at the end of the five year lease period. The economic life of the equipment is six years at which time it will have no scrap value. Florida Sun Ltd has a financial year ending 31 December. Required A. Explain whether Florid Sun Ltd should classify the lease as finance lease or an operating lease.
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