Question

Samson Inc. leases equipment from Gerhard for a six-year period. The lease contract includes a purchase option, the conditions of which make it likely that Samson will exercise the option. The equipment’s estimated useful life is eight years. Samson should amortize the associated right-to-use asset over:

Multiple Choice

• 7 years.

• 6 years.

• 8 years.

• either 6 or 8 years.

Answer 1

Answer is 8 years

The right to use asset is amortized over shorter of useful life of the asset and the lease term, unless the title transfers to the lessee at the end of the lease term. If the title transfers to the lessee at the end of the lease term the right to use asset is amortized over useful life of the asset that is 8 years in this given case since Samson Inc will exercise the option to purchase the equipment at the end of the lease term. 6 years cannot be used since the lessee is exercising the purchase option at end of 6^th year. So answer is 8 years. 7 years is not applicable in the given question.