The Haavelmo Widget Corporation has just signed a 60-month lease on an asset with a 6-year life. The lessor will retain the property at the end of the lease, and the present value of the minimum lease payments is $470,000. The estimated fair value of the property is $600,000. Is this an operating lease?

Question

Quizplus · Accepted Answer

The lease term of 60 months is greater than 75% of the asset's useful life of 6 years (i.e., 54 months). Additionally, the present value of minimum lease payments exceeds 90% of the fair value of the property. These criteria indicate that the lease should be classified as a finance lease, not an operating lease.

The Haavelmo Widget Corporation Has Just Signed a 60-Month Lease