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 lease term is equal to 75% or more of the estimated economic life of the leased property. B. The present value of the minimum lease payments is 75% or more of the fair value of the leased property. C. The lease agreement requires that title of the leased property remains with the lessor at the end of the lease term. D. The lease agreement contains an option to purchase the leased property at its fair value 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 lease term is equal to 75% or more of the estimated economic life of the leased property. B. The present value of the minimum lease payments is 75% or more of the fair value of the leased property. C. The lease agreement requires that title of the leased property remains with the lessor at the end of the lease term. D. The lease agreement contains an option to purchase the leased property at its fair value at the end of the lease term.

Explanation / Answer

A. The lease term is equal to 75% or more of the estimated economic life of the leased property.

Explanation : One of the criteria for classifying a lease as a capital lease is that the lease period should be atleast 75% of economic life of the asset. Such condition is based on the assumption that most risk & reward of ownership incures during the first 75 % of the life of asset.

Why other statements are incorrect

B The present value of the minimum lease payments is 90 % or more of the fair value of the leased property.

C. The lease agreement requires that title of the leased property shifts from the lessor to lessee at the end of the lease term.

D . The lease agreement contains an option to purchase the leased property for below - market price at the end of the lease term

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