Question

Which of the following is not a condition requiring the use of the capital lease reporting method?

Select one:

A. The lease automatically transfers ownership of the leased asset from the lessor to the lessee at the termination of the lease.

B. The lease provides that the lessee can purchase the leased asset for a nominal amount (bargain purchase price) at the termination of the lease.

C. The lease term is at least 75% of the remaining estimated economic useful life of the leased asset.

D. The lease allows the lessee to use the leased asset during the lease term.

Answer 1

A lease is a contractual agreement where the asset is leased by one party (lessor) to the other party (lessee) in lieu of a periodic payment (lease rent). Following are the two types of leases: 1. Operating lease 2. Capital lease A lease is classified as capital lease if it qualifies any of the following condition: 1. Lease period covers 75% or more of estimated economic useful life of leased asset. 2. If present value of lease rentals is more than 90% or more of the fair market value. 3. If lessee will get an option of buying the leased asset at a discounted rate. 4. If title of the asset will be transferred to lessee at the end of lease. Based on above mentioned classification criteria it can be interpreted that option D is not qualifying any condition. Hence the answer is Option D.