Question 7 10 marks Waze inc signed a 7year lease for a comm

Question 7 (10 marks) Waze inc. signed a 7-year lease for a communication tower with a cost of $189,000, The asset has an economical life of 8 years with zero sswage value. Armual minimum ease payments made at the end of year are S29.000 and the discount rate is 4%. No maintenance is required and there is no bargain purchase option avarisbie on the ease Identify whether the tower should be treated as an operating or capital lease assuming Stellar follows ASPE. The factor for the present value of an annuity at 4 years is 6 73274 . The factor for the present value ct an annuity at 4%-or T year\'s 8.00205 Instructions Identify whether the tower should be treated as an operating or capita) lease. Show your work to support your answer

Solution

In the above case tower will be treated as operating lease.

1 ownership of tower remains with the lessor for the entire lease period.

2 lease does not have any any option to buy the asset during the lease period.

3 no running or administration expenses are to be borne for tower.

4 cost of tower is not equal to present annual lease payment of the asset. (Working note 1)

1. Working note

Calculatuon of present value of annual lease payment.

annual lease payment * present value factor

$29000*6.00205 = $174059

In this case Pesent value of annual lease payment not equal to lease assets heance assets will be treated as operating lease.