The lessee must record a lease as an asset if the lease
A) transfers ownership of the property to the lessor.
B) contains a purchase option.
C) term is 75% or more of the useful life of the leased property.
D) payments equal or exceed 90% of the fair value of the leased property.

Question

Quizplus · Accepted Answer

According to the Generally Accepted Accounting Principles (GAAP), a lease must be recorded as an asset by the lessee if it meets any of the following criteria:
- The lease transfers ownership of the property to the lessee (not the lessor), which is not the case in any of the given options.
- The lease contains a purchase option, which is not sufficient on its own.
- The lease term is 75% or more of the useful life of the leased property.
- The present value of lease payments (total payments discounted at the interest rate implicit in the lease) equals or exceeds 90% of the fair value of the leased property. 
Out of the given options, only option C meets this criterion, as the lease term is 75% or more of the useful life of the leased property. Therefore, the lessee must record the lease as an asset on their balance sheet. According to the guidelines set forth by the Financial Accounting Standards Board (FASB), the lessee must record a lease as an asset if the term of the lease is 75% or more of the useful life of the leased property, as this indicates that the lessee essentially has control and use of the property for the majority of its useful life. Options A, B, and D are not necessarily indicators of whether the lease should be recorded as an asset or not.

The Lessee Must Record a Lease as an Asset If