Lease A does not contain a bargain purchase option, but the lease term is equal

Question

Lease A 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 B 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 A Lease B

a. Operating lease Finance lease

b. Operating lease Operating lease

c. Finance lease Finance lease

d. Finance lease Operating lease

Explanation / Answer

Answer: Option b. Operating lease Operating lease

Both the leases A and B should be classified as operating leases.

Lease A since it does not contain a bargain purchase option and the lease term is also shorter than the estimated economic life of the leased property, is an operating lease.

Lease B does not transfer ownership in the leased property to the lessee by the end of the lease term and the lease term is also shorter than the estimated economic life of the asset.

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