Lease X does not contain a bargain purchase option,but the lease term is equal to 90 percent of the estimated economic life of the leased property.Lease Y does not transfer ownership of the property to the lessee by the end of the lease term,but the lease term is equal to 75 percent of the estimated economic life of the leased property.How should the lessee classify these leases? Lease X Lease Y
A) Capital lease Operating lease
B) Capital lease Capital lease
C) Operating lease Capital lease
D) Operating lease Operating lease

Question

Quizplus · Accepted Answer

Leases are classified as capital leases if they meet any of the following criteria: lease term is equal to or greater than 75% of the estimated economic life of the leased property, ownership is transferred to the lessee by the end of the lease term, there is a bargain purchase option, or the present value of the lease payments equals or exceeds 90% of the fair value of the leased property. Since Lease X has a term equal to 90% of the estimated economic life and Lease Y has a term equal to 75%, both meet the criteria for capital leases.

Lease X Does Not Contain a Bargain Purchase Option,but the Lease