Reference no: EM133173236

Question - Malfoy Inc. has just leased a vanishing cabinet from Borgin and Burkes (B&B). The cabinet was manufactured by B&B at a cost of $650,000 and currently sells for $800,000. The three year lease begins Jan. 153 2017 and requires payments at the beginning of every year. B&B has priced an 11% return into the lease. Malfoy Corporation has a 12% incremental borrowing rate and does not know the implicit rate on the lease. B&B expects the cabinet to be worth $350,000 at the end of the lease and Malfoy has guaranteed $280,000 of this value. Due to the heavy use Malfoy expects to put the cabinet through, it only expects the residual value to be $260,000. The cabinet has an expected useful life of 20 years and a salvage value of $50,000. Malfoy also incurred $5,000 in lease documentation costs. The lease has no purchase options, collectability of payments is probable, and the cabinet is not specialized in nature. Both companies have Dec. 31st year ends.

Required -

1. What annual payments will the B&B require for the lease?

2. State the five classification criteria. What type of lease is this for the lessor (B&B)?

3. What type of lease is this for the lessee (Malfoy)?