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28 Sep 2019
Which of the following is a criterion for classifying a lease as a capital lease by a lessee? A. The present value of the minimum lease payments is 75% or more of the fair value of the leased property. B. The lease term is equal to 75% or more of the estimated economic life of the leased property. C. The lease agreement contains an option to purchase the leased property at its fair value at the end of the lease term. D. The lease agreement requires that title of the leased property remains with the lessor at the end of the lease term.
| Which of the following is a criterion for classifying a lease as a capital lease by a lessee? | |
| A. | The present value of the minimum lease payments is 75% or more of the fair value of the leased property. |
| B. | The lease term is equal to 75% or more of the estimated economic life of the leased property. |
| C. | The lease agreement contains an option to purchase the leased property at its fair value at the end of the lease term. |
| D. | The lease agreement requires that title of the leased property remains with the lessor at the end of the lease term. |
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Related questions
For each of the three independent situations below determine the amount of the annual lease payments. Each describes a capital lease in which annual lease payments are payable at the beginning of each year. Each lease agreement contains an option that permits the lessee to acquire the leased asset at an option price that is sufficiently lower than the expected fair value that the exercise of the option appears reasonably certain. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
| Situation | |||||||||
| | |||||||||
| 1 | 2 | 3 | |||||||
| Lease term (years) | 5 | 15 | 4 | ||||||
| Lessorâs rate of return | 10 | % | 11 | % | 9 | % | |||
| Fair value of leased asset | $ | 90,000 | $ | 435,000 | $ | 200,000 | |||
| Lessorâs cost of leased asset | $ | 65,000 | $ | 435,000 | $ | 160,000 | |||
| Bargain purchase option: | |||||||||
| Option price | $ | 25,000 | $ | 65,000 | $ | 37,000 | |||
| Exercisable at end of year: | 5 | 5 | 3 | ||||||
