Question 1

Lessor Corp enters into a lease with Lessee Inc. The asset has a fair value of $100,000 and a carrying amount of $80,000. The present value of the lease payments is $95,000. The lease term is 4 years (economic life 10 years). Ownership does not transfer, and there is no purchase option. However, the asset is highly specialized and will have no alternative use to Lessor Corp at the end of the lease term. How should Lessor Corp classify this lease?

Accepted Answer

Check the 5 criteria (OWNES): Ownership transfer? Written option to purchase? Net present value (90% test)? Economic life (75% test)? Specialized asset? If ANY are met, it is a Sales-Type lease for the lessor.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Thinking 'Finance Lease' applies to Lessors; ignoring the specialized asset criterion because the term/PV tests failed.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA BAR Practice Exam 5

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