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Nicomekl Novelties entered into a lease on January 1 2017 to lease a delivery van for three years from Fraser

Question

Nicomekl Novelties entered into a lease on January 1, 2017, to lease a delivery van for three years from Fraser

Cheam Finance Corporation. The fair value of the van on that date was $55,000 which was its cost to Fraser Cheam Finance Corporation. Lease payments were to be made quarterly beginning on January 1, 2017. The terms of the lease allow Nicomekl Novelties to purchase the van at the end of the lease term for a payment of $20,000 which is the estimated fair value of the vehicle at the end of the lease term. The residual value of the vehicle is estimated to be $5,000 at the end of its useful life of ten years. The implicit rate of the lease is 8% per annum (2% per quarter) and is known to Nicomekl. Both companies amortize all capital assets using the straight-line method.

Required:


Determine the lease classification for Fraser Cheam Finance Corporation. Evaluate all potential considerations.

Business

Nicomekl Novelties entered into a lease on January 1 2017 to lease a delivery van for three years from Fraser