Which of the following is a criterion for classifying a lease as a capital lease

Question

Which of the following is a criterion for classifying a lease as a capital lease by a lessee? A. The present value of the minimum lease payments is 75% or more of the fair value of the leased property. B. The lease term is equal to 75% or more of the estimated economic life of the leased property. C. The lease agreement contains an option to purchase the leased property at its fair value at the end of the lease term. D. The lease agreement requires that title of the leased property remains with the lessor at the end of the lease term. Which of the following is a criterion for classifying a lease as a capital lease by a lessee? A. The present value of the minimum lease payments is 75% or more of the fair value of the leased property. B. The lease term is equal to 75% or more of the estimated economic life of the leased property. C. The lease agreement contains an option to purchase the leased property at its fair value at the end of the lease term. D. The lease agreement requires that title of the leased property remains with the lessor at the end of the lease term.

Explanation / Answer

Following are the criterion for classifying a lease as a capital lease by a lessee :

1. Transfer of ownership by end of lease term

2. Lessee can purchase asset at below market price

3.Lease term is 75% or more of the asset life

4. Present value of lease payment is 90% or more of the fair market value at start of lease

so answer is b) The lease term is equal to 75% or more of the estimated economic life of the leased property.

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