Johntech Inc. leased a new machine having an expected useful life of 30 years from Carbide Co. Terms of the noncancelable 25-year lease were that Johntech would gain title to the property upon payment of a sum equal to the fair market value of the machine at the termination of the lease. Johntech accounted for the lease as a capital lease and recorded an asset and a liability in the financial records. The asset recorded under this lease should properly be amortized over
A) 5 years (the period of actual ownership).
B) 22.5 years (75 percent of the 30-year asset life).
C) 25 years (the term of the lease).
D) 30 years (the total asset life).

Question

Quizplus · Accepted Answer

The asset recorded under the lease should be amortized over the term of the lease, which is 25 years. This is in line with the accounting treatment for capital leases, as it reflects the period of economic benefit obtained by the lessee under the lease agreement. The total asset life of 30 years is not relevant in this case, as Johntech only has the right to use the asset for the term of the lease.