On February 1, 2009, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is 8 years. The fair market value of the equipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least

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In order to determine whether or not a lease is a capital lease, one of the criteria is that the present value of minimum lease payments must be equal to or greater than 90% of the equipment's fair market value. In this case, 90% of $600,000 is $540,000. Therefore, if the present value of the minimum lease payments is $540,000 or greater, the lease must be classified as a capital lease.

On February 1, 2009, Pearson Corporation Became the Lessee of Equipment