Question

Select from the option list provided whether each item is a criterion that, if satisfied, results in classification of a lease as a capital lease by the lessee. Each choice may be used once, more than once, or not at all.

a) For a capital lease

b) NOT for a capital lease

Criterion
1. The lease term is 90% or more of the estimated economic life of the leased property.
2. The lease contains a bargain purchase option.
3. The present value of the minimum lease payments must include the executory costs.
4. The lease provides for the transfer of ownership of the leased property.
5. The present value of the minimum lease payments is at least 90% of the fair value of the leased property.
6. The beginning of the lease term falls within the last 25% of the total estimated economic life, and the present value of the minimum lease payments is at least 90% of the fair value of the leased property.
7. The lease term is 75% or more of the estimated economic life of the leased property.

Answer 1

For a lease to be a capital lease, any one of the following four criterian should be satisfied:

1. Ownership of the asset is transferred from the lessor to lesee at the end of the lease term.

2. There is a bargain purchase option under which the lessee can purchase the assert at the end of the lease term.

3. The lease term is at least 75% of the useful life of the asset.

4. The present value of the minnimum lease payments is at least 90% of the asssets fair value.

The given criterion can be classified as "for a capital lease" or "not for a capital lease" based on the above explanation as follows: