Reference no: EM132531692
Question - ABC Corporation enters into an agreement with XYZ Rentals Co. on January 1, 20X1 for the purpose of leasing a machine to be used in its manufacturing operations. The following data pertain to the agreement:
1. The term of the non-cancelable lease is 3 years with no renewal option. Payments of $155,213 are due on December 31 of each year.
2. The fair value of the machine on January 1, 20X1, is $400,000. The machine has a remaining economic life of 10 years, with no salvage value. The machine reverts to the lessor upon the termination of the lease.
3. ABC depreciates all machinery it owns on a straight-line basis.
4. ABC's incremental borrowing rate is 10% per year. ABC does not have knowledge of the 8% implicit rate used by XYZ.
From the viewpoint of XYZ, what type of lease agreement exists?
a. Sales-type lease
b. Operating lease
c. Direct-financing lease
d. Sale-leaseback
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