On January 1, 2014, Draper Inc. signed a five-year non-cancelable lease with Thorn hill Company for custom-made equipment. The lease calls for five payments of $161,364.70 to be made at the beginning of each year. The leased asset has a fair value of $900,000 on January 1, 2014. There is no bargain purchase option, and ownership of the leased asset reverts to Thorn hill at the lease end. The leased asset has an expected useful life of six years, and Draper uses straight-line depreciation for financial reporting purposes. Its incremental borrowing rate is 8%. Draper uses a calendar year for financial reporting purposes.
1. Under U.S. GAAP, would Draper classify this lease as a capital lease or as an operating lease? Explain. 2. Under IFRS, would Draper classify this lease as a capital lease or as an operating lease? Explain.
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