The FASB defines financial lease as leases that meet the following: The lease agreement transfers ownership...

The FASB defines financial lease as leases that meet the following:

The lease agreement transfers ownership to the lessee before the lease expires, or the lessee can purchase the asset for a bargain price when the lease expires.

The lease agreement transfers ownership to the lessee before the lease expires or the lessee can purchase the asset for a bargain price when the lease expires, or the lease lasts for at least 75 percent of the asset's estimated economic life.

The lease agreement transfers ownership to the lessee before the lease expires, or the lessee can purchase the asset for a bargain price when the lease expires, or the lease lasts for at least 75 percent of the asset's estimated economic life, or the present value of the lease payments is at least 90 percent of the asset's value.

Solutions

Expert Solution

To be classified as an operating lease or capital/finance lease, Companies must test for four criteria “bright line” tests that determine whether rental contracts must be booked as operating or capital leases:

There is an ownership transfer to the lessee at the end of the lease
The lease contains a bargain purchase option
The lease life exceeds 75% of the asset's economic life
The present value of the lease payments exceed 90% of the asset's fair market value

If none of these conditions are met, the lease can be classified as an operating lease, otherwise, it is likely to be a capital lease.

Therefore, Correct answer is

The lessee can purchase the asset for a bargain price when the lease expires, or the lease lasts for at least 75 percent of the asset's estimated economic life, or the present value of the lease payments is at least 90 percent of the asset's value. because in all other options it is given as The lease agreement transfers ownership to the lessee before the lease expires. one of the conditions to be classified as capital lease is There is an ownership transfer to the lessee "at the end of the lease."

jeff jeffy answered 4 months ago

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