Question

Lease A does not contain a bargain purchase option, but the lease term is equal to 90% 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

Both of these leases should be classified as a capital lease. A capital lease is defined as a lease in which the person who is leasing the asset only finances the leased asset, all of the other rights of ownership are transferred to the person who is taking out the lease. This makes the lease a fixed asset because it is temporarily being used.