Asked by Jackson Willis on May 22, 2024
Verified
Which of the following correctly states a lessee criterion for classifying a lease as a capital lease?
A) The lessee guarantees the residual value.
B) The sum of the lease payments exceeds 90% of the fair value of the asset.
C) The asset is the property of the lessor at the end of the lease term.
D) The lease term is equal to 75% or more of the estimated economic life of the leased asset.
Estimated Economic Life
The expected period over which an asset is considered to be useful and contribute to the earnings of a business, affecting its depreciation or amortization.
Capital Lease
A lease agreement in which the lessee essentially acquires the ownership rights of the leased asset, also referred to as a finance lease.
Residual Value
The estimated salvage value or the worth of an asset at the end of its useful life.
- Understand the criteria for classifying leases as capital or operating from the lessee’s perspective.
Verified Answer
RG
Raven GarrisMay 23, 2024
Final Answer :
D
Explanation :
According to accounting standards, a lease must be classified as a capital lease if it meets any one of four criteria, and one of the criteria is that the lease term is equal to 75% or more of the estimated economic life of the leased asset. Therefore, option D is the correct choice that states a lessee criterion for classifying a lease as a capital lease. The other options are incorrect because the lessee guaranteeing the residual value (Option A) is a lessor criterion, the sum of the lease payments exceeding 90% of the fair value of the asset (Option B) is one of the lessor criteria, and the asset being the property of the lessor at the end of the lease term (Option C) is not a valid criterion for classifying a lease as a capital lease.
Learning Objectives
- Understand the criteria for classifying leases as capital or operating from the lessee’s perspective.