A lessee must account for a lease as a capital lease if:

I. lease transfers ownership to lessee at the end of the lease.
II. lease contains option to purchase the asset at the end of the lease at a bargain price.
III. lease is longer than 20 years.
IV. present value of lease is greater than 10% of lessee's assets.

A)I and II
B)I, II and III
C)I, III and IV
D)I, II and IV

Question

A lessee must account for a lease as a capital lease if:

I. lease transfers ownership to lessee at the end of the lease.
II. lease contains option to purchase the asset at the end of the lease at a bargain price.
III. lease is longer than 20 years.
IV. present value of lease is greater than 10% of lessee's assets.

A)I and II
B)I, II and III
C)I, III and IV
D)I, II and IV

Quizplus · Accepted Answer

I and II are correct because a lease is classified as a capital (or finance) lease if it transfers ownership to the lessee by the end of the lease term or contains a bargain purchase option. The length of the lease (III) and the comparison of the present value of the lease payments to the lessee's assets (IV) are not criteria for classifying a lease as a capital lease under accounting standards.

A Lessee Must Account for a Lease as a Capital