Question

Which of the following lease criteria would not qualify a lease as a capital lease? Multiple Choice The lease term is equal to or greater than 75% of the estimated economic life of the leased property. The lease transfers ownership of the property to the lessee by the end of the lease term. The present value of the minimum lease payments equals or exceeds 90% of the fair value of the leased property. The lease contains an option to purchase the leased property at its fair market value.

Answer 1

ANSWER

The lease contains an option to purchase the leased property at its fair market value.

If the lease in non-cancelable and meets one or more of the following four criteria it is defined as Capital lease. The four criteria are: -

1. The ownership of the asset is transferred by the lessor to the lessee.
2. The lease contains a bargain-purchase option.
3. The lease term is 75% or more of the economic life of the asset.
4. The Present value of the minimum lease payments either equals or exceeds the 90% of the fair value of the leased asset.

1. Bargain purchase option – When there is option given to the lessee to purchase the leased asset at the end of the term it is referred to as Bargain purchase option. The price at which the asset can be purchased is generally below the fair market value existing at the time of purchase option.

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