On January 1, 2020, Parker Company signed an 8-year noncancelable, nonrenewable lease agreement to lease a storage building from Chili Equipment Company. The following information pertains to this lease agreement.
(a) Parker will pay equal rental payments at the beginning of each year.
(b) The fair value of the building on January 1, 2020 is $5,000,000; however, the book value to Chili is $4,125,000.
(c) The building has an estimated economic life of 10 years, with no residual value. Parker depreciates similar buildings on the straight-line method.
(d) At the termination of the lease, the title to the building will remain with the lessor, with no purchase option.
(e) Parker’s incremental borrowing rate is 11% per year. Chili Equipment Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Parker Company.
What type of lease would this be for the lessee?
