Question 1

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?

Accepted Answer

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).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Using 'Finance Lease' (Lessee term) for a Lessor; failing to check the percentages.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA BAR Practice Exam 3

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