If a corporation signs a ten-year lease for a building and the present value of the lease payments is $250,000,the lease is a capital lease if the
A)fair value of the building is $1,000,000.
B)remaining useful life of the building is 20 years.
C)lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000.
D)building reverts back to the lessor at the end of the lease.

Question

Quizplus · Accepted Answer

According to the capital lease criteria, the lease would be considered a capital lease if it meets any one of the following conditions:
1. The lease transfers ownership of the property to the lessee at the end of the lease term (D).
2. The lease contains a bargain purchase option (C).
3. The lease term is equal to or greater than 75% of the estimated economic life of the property (B).
4. The present value of the minimum lease payments is equal to or greater than 90% of the fair value of the property (A).

Here, since the lease contract contains a bargain purchase option, under which the lessor can purchase the building for $5,000 at the end of the lease when the fair value is estimated to be $25,000, it meets the capital lease criteria. Hence, the correct option is C.

If a Corporation Signs a Ten-Year Lease for a Building