ExpertHard1 markMultiple Choice
CPA · Question 37 · Area II: Technical Accounting
Lessor Corp leases a machine to Lessee Inc. <br/>- Lease term: 4 years<br/>- Asset economic life: 10 years<br/>- PV of lease payments: $85,000<br/>- Asset Fair Value: $100,000<br/>- No transfer of ownership or purchase option.<br/>- The asset is not specialized.<br/><br/>How should Lessor Corp classify this lease?
Lessor Corp leases a machine to Lessee Inc. <br/>- Lease term: 4 years<br/>- Asset economic life: 10 years<br/>- PV of lease payments: $85,000<br/>- Asset Fair Value: $100,000<br/>- No transfer of ownership or purchase option.<br/>- The asset is not specialized.<br/><br/>How should Lessor Corp classify this lease?
Answer options:
A.
Sales-Type Lease
B.
Operating Lease
C.
Direct Financing Lease
D.
Finance Lease
How to approach this question
Check the 5 criteria (OWNES): Ownership? Written option? Net PV > 90%? Economic life > 75%? Specialized? If none -> Operating (or Direct Financing if risk is low).
Full Answer
B.Operating Lease✓ Correct
4/10 years = 40% (<75%). $85k/$100k = 85% (<90%). No ownership transfer or purchase option. Not specialized. Therefore, Operating Lease.
Common mistakes
Confusing Lessee terms (Finance) with Lessor terms (Sales-Type); miscalculating the percentages.
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