ExpertMedium1 markMultiple Choice
CPA · Question 24 · Area II: Technical Accounting
On January 1, Year 1, Lessor Corp. leases equipment to Lessee Inc. for a 5-year term. The equipment has a fair value of $100,000 and a remaining economic life of 6 years. The lease payments have a present value of $92,000. There is no transfer of ownership or purchase option. How should Lessor Corp. classify this lease?
On January 1, Year 1, Lessor Corp. leases equipment to Lessee Inc. for a 5-year term. The equipment has a fair value of $100,000 and a remaining economic life of 6 years. The lease payments have a present value of $92,000. There is no transfer of ownership or purchase option. How should Lessor Corp. classify this lease?
Answer options:
A.
Operating Lease
B.
Direct Financing Lease
C.
Sales-Type Lease
D.
Finance Lease
How to approach this question
Check the 5 criteria (OWNES): Ownership transfer, Written option to purchase, Net present value (90%), Economic life (75%), Specialized asset. If ANY are met -> Sales-Type (for Lessor).
Full Answer
C.Sales-Type Lease✓ Correct
The lease term (5 years) is 83% of the economic life (6 years), exceeding the 75% threshold. Also, the PV of payments ($92k) is 92% of FV ($100k), exceeding the 90% threshold. Meeting either makes it a Sales-Type lease for the lessor.
Common mistakes
Using 'Finance Lease' (Lessee term) for a Lessor; failing to check the percentages.
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