When a lease contract does not transfer title to the lessee, there is no purchase option reasonably certain to be exercised, and the lease term is not the major part of the asset's remaining economic life
A) The lessee must classify the lease as an operating lease.
B) The amount of unguaranteed salvage value, if any, determines whether the lease is a finance lease or an operating lease.
C) The interest rate used to determine the present value of the minimum lease payments also determines whether the lease is a finance lease or an operating lease.
D) The lessee must use the greater of the lessor's rate of return or the lessee's incremental borrowing rate to determine whether the lease is a finance lease or an operating lease.

Question

Quizplus · Accepted Answer

According to the criteria listed, when a lease contract does not transfer title to the lessee, there is no purchase option reasonably certain to be exercised, and the lease term is not the major part of the asset's remaining economic life, the lessee must classify the lease as an operating lease. This is because the lease is not considered to transfer risks and rewards of ownership to the lessee, and as a result, the lessee does not record the leased asset as an owned asset and the lease payments are recorded as rent expense over the term of the lease. The amount of unguaranteed salvage value, interest rate used, or the lessee's incremental borrowing rate are not relevant factors in determining the classification of the lease if it already meets the criteria for an operating lease.

When a Lease Contract Does Not Transfer Title to the Lessee