Kurtain Corp.leased a new building and land from Harlow Leasing Inc.for 20 years.At the inception of the lease the building and land have fair market values of $150,000 and $20,000,respectively.The building has an expected economic life of 25 years.Which of the following statements is correct regarding Kurtain's treatment of the lease?
A) Kurtain should treat the lease as a capital lease provided that the land and building are recorded in separate asset accounts and accounted for separately.
B) Kurtain should treat the lease as a capital lease only if there is either a bargain purchase option or an automatic transfer of ownership at the termination of the lease.
C) Kurtain should treat the lease as a capital lease even though there is no bargain purchase option and no automatic transfer of ownership at the termination of the lease.
D) Kurtain should treat the lease as a capital lease only if Harlow treats the transaction as a leveraged lease.

Question

Quizplus · Accepted Answer

According to the lease classification criteria, a lease is considered a capital lease if it meets any one of the four conditions outlined in ASC 840-10-25-1. The conditions include transfer of ownership, bargain purchase option, lease term exceeding 75% of the asset's economic life, and present value of lease payments exceeding 90% of the asset's fair value. In this scenario, the lease term is 20 years, which exceeds 75% of the building's economic life of 25 years. Therefore, the lease should be treated as a capital lease, even though there is no bargain purchase option or automatic transfer of ownership. The land and building should be recorded as separate assets and accounted for separately.