Question

Marnie Company enters into a two-year lease. The terms of the lease do not transfer ownership and do not contain a bargain purchase option. The lease is for 60% of the asset's economic life and represents 80% of its fair value. The asset is not a specialized asset and does have alternative uses. How should Marnie classify and record the lease?

a. The lease should be classified as an operating lease, and a lease liability should be recorded at the commencement date of the lease.

b. The lease should be classified as a finance lease, and a lease liability should be recorded at the inception of the lease.

c. The lease is classified as an operating lease, and no lease liability is recorded at the inception because it does not meet finance lease criteria.

d. The lease should be classified as a short-term lease because it is for only two years.

Answer 1

ANSWER: The correct option that Marnie should use to classify and record the lease is

c. The lease is classified as an operating lease, and no lease liability is recorded at the inception because it does not meet finance lease criteria.

The option a. is not correct because in operating lease the payments are considered as operating expenses shown in the profit and loss account and the asset being leased are not shown in the company's Balancesheet

The option b. is also not correct because to be classified as finance lease it must satisfy certain conditions as per the U.S GAAP which are as follows:

1. OWNERSHIP: Might transfer to the lessee at the end of the lease term

2.Bargain purchase option: Financial lease enables the lessee to buy an asset at less than FAIR MARKET VALVE.

3.TERM: Equals or exceeds 75% of the asset's estimated useful life.

4. Present valve: PV of lease payments equals or exceeds 90% of the assets original cost.

The option d. is also not correct because to be classified as short term lease the rental period should be under 6 months