Question 1

Lessor Corp leases a machine to Lessee Inc. for 4 years. The machine has a 5-year economic life. The present value of the lease payments is $95,000, and the fair value of the machine is $100,000. Lessor Corp is reasonably certain to collect the payments. There is no transfer of ownership or purchase option.

How should Lessor Corp classify this lease?

Accepted Answer

Check the 5 criteria (OWNES): Ownership, Written option, Net present value (90%), Economic life (75%), Specialized asset. If ANY are met -> Sales-Type.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Thinking it must transfer ownership to be Sales-Type.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA BAR Practice Exam 4

More questions from this exam