If the present value of lease payments equals or exceeds 90% of the fair value of the leased property the
A) conditions are met for the lease to be considered a capital lease.
B) lease is uneconomical and should not be entered into.
C) lease may be classified as an operating lease.
D) recording of a lease liability is optional-that is the off-balance sheet approach can be elected.

Question

Quizplus · Accepted Answer

According to ASC 840 (now ASC 842), if the present value of lease payments equals or exceeds 90% of the fair value of the leased property, the conditions are met for the lease to be considered a capital lease. Therefore, choice A is the correct answer. Choice B is incorrect as the economic viability of a lease depends on multiple factors and cannot be determined solely based on this criterion. Choice C is also incorrect as while it is possible for the lease to be classified as an operating lease, it would only be the case if certain criteria are met. Choice D is incorrect as a lease liability must be recorded for capital leases under ASC 840/ASC 842, and the off-balance sheet approach is no longer permitted.

If the Present Value of Lease Payments Equals or Exceeds