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?

Answer 1

Answer:

Lease A Capital lease

Lease B Capital lease

Explanation:

A capital lease is a contract that that entitles a renter temporary usage of an asset. So for accounting purposes it is considered that for that period the renter is the owner of the asset.

To be considered a capital lease it must satisfy any of these criteria:

- The life of the lease must be equal to or greater than 75%

- There should be a bargaining option for price less than market value

- The lessee will gain ownership at the end of lease period

- The present value of lease should be greater than 90% of market value of asset

Both of these properties satisfy at least one of these criteria so they are both capital leases.