Asked by Ashley McKenna on Mar 10, 2024
Verified
If a lease is classified as a capital lease because the lease agreement contains a bargain purchase option, the time period to be used by the lessee to amortize the leased property is
A) the lease term
B) the expected economic life of the property
C) the lease term or the expected economic life of the property, whichever is shorter
D) the maximum amortization period for intangible assets
A) the lease term
B) the expected economic life of the property
C) the lease term or the expected economic life of the property, whichever is shorter
D) the maximum amortization period for intangible assets
Capital Lease
A lease agreement that is treated like an asset purchase for accounting purposes, where the lessee obtains the benefits and risks of ownership.
Bargain Purchase Option
An option in a lease agreement that allows the lessee to purchase the leased item at a price significantly lower than its expected fair market value.
Economic Life
The expected period of time during which an asset is useful to the average owner, or until the asset can no longer be economically used.
- Calculate the depreciation of leases and discern the significance of residual values in the process.
Verified Answer
OI
Olivia Irvin
Mar 10, 2024
Final Answer :
B
Explanation :
When a lease is classified as a capital lease with a bargain purchase option, the lessee amortizes the leased property over its expected economic life. This is because the bargain purchase option implies that the lessee is likely to purchase the asset at the end of the lease term, effectively making the lessee the owner of the asset for its remaining economic life.
Learning Objectives
- Calculate the depreciation of leases and discern the significance of residual values in the process.