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Classify the lease as either operating or finance lease

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Reference no: EM132606637

On 1 July 2015, LMN Ltd sells a tractor having a carrying amount on its books of $100,000 to XYZ Ltd for $140,000 and immediately leases the tractor back under the following conditions:

  1. The terms of the lease are 10 years, non-cancellable, and requires rental payments of $22,784 at the end of each year.
  2. The estimated economic life of the tractor is 10 years.
  3. There is no residual value.
  4. LMN Ltd pays all executor costs (meaning, not included in the lease payments).
  5. The rate of interest is 10% per year

Required:

Question 1: Classify the above lease as either operating or finance lease. Provide arguments to support your classification.

Reference no: EM132606637

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