innetonka Company leases an asset. Information regarding the lease: • Fair value of the asset: $400,000. • Useful life of the asset: 6 years with no salvage value. • Lease term is 5 years. • Annual lease payments are $60,000 • Implicit interest rate: 11%.

This is a finance lease.

Explanation:

Note: This question is not complete. The complete question is therefore provided before answering the question as follows:

Minnetonka Company leases an asset. Information regarding the lease:

Fair value of the asset: $400,000.

Useful life of the asset: 6 years with no salvage value.

Lease term is 5 years.

Annual lease payments are $60,000

Implicit interest rate: 11%.

Minnetonka can purchase the asset at the end of the lease period for $50,000.

What type of lease is this?

The explanation of the answer is now provided as follows:

Finance lease can be described a lease in which the finance company legally owns the asset throughout the lease term, but the lessor transfers all risk and reward connected with the asset to the lessee, and the lessee also acquires the ownership of the asset at the end of the lease term.

Since Minnetonka can purchase the asset at the end of the lease period for $50,000, this implies that Minnetonka can acquires the ownership of the asset at the end of the lease term. This therefore implies that this is a finance lease.

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