Minimum lease payments are made on a straight-line basis

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Reference no: EM131010874

Lessee Santi contracts for three leases of three machines for six months: lease A, lease B and Lease C. Each lease is non-cancelable and each machine reverts to the lessor at the end of the lease term. The first rental payment for each machine is paid at the inception of the lease, with the balance to be paid in equal amounts at the start of each of five quarters thereafter. The lessors agreed to pay the executory costs and included this amount in the lease rentals. For each of the machine the present value of the minimum lease payment is equal to 55% of the fair value of the machine. The following information is peculiar to each lease: 1. Lease A: it is agreed that at the time of the sixth payment, for an added bargain purchase option payment Lessee Santi can buy the property. The lease term is equal to 70% of the estimated economic life of the asset. 2. Lease B: does not give the lessee the option to buy the machine. The lease term is equal to 90% of the estimated economic life of the asset. 3. Lease C: does not give the lessee the option to buy the machine. The lease term is equal to 70% of the estimated economic life of the asset. Required: 1. How should Santi classify each of the three leases above, and why? Discuss the rationale for your answer. 2. What amount, if any, should Santi record as a liability at the inception of the lease for each of the three leases above? 3. Assuming that the minimum lease payments are made on a straight-line basis, how should Santi record minimum lease payment for each of the three leases above?

Reference no: EM131010874

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