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On January 1, 2022, Delphia, Inc. signs a 10-year noncancelable lease agreement to lease a storage building from Musselshell Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor.
The following information pertains to this lease agreement.
(a) The agreement requires equal rental payments at the beginning each year.(b) The fair value of the building on January 1, 2022 is $5,000,000; however, the book value to Musselshell is $4,200,000.(c) The building has an estimated economic life of 10 years, with no residual value. Delphia depreciates similar buildings on the straight-line method.(d) At the termination of the lease, the title to the building will be transferred to the lessee.(e) Delphia's incremental borrowing rate is 11% per year. Musselshell Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Delphia, Inc.
Problem 1: From the lessee's viewpoint, what type of lease exists in this case?
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