On February 1, 2013, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is eight years. The fair 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

Question

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According to ASC 840-10-25-1, a lease should be classified as a capital lease if "the present value at the beginning of the lease term of the minimum lease payments . . . equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor and expected to be realized." 
In this case, the fair value of the equipment is $600,000, and there is no indication of any related investment tax credit. Therefore, the 90 percent threshold is $540,000 (90% of $600,000). As long as the present value of the minimum lease payments equals or exceeds this amount, the lease should be classified as a capital lease. Therefore, choice B ($540,000) is the correct answer.

On February 1, 2013, Pearson Corporation Became the Lessee of Equipment