ExpertHard1 markMultiple Choice
CPA · Question 09 · Area II: Technical Accounting
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?
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?
Answer options:
A.
Sales-Type Lease
B.
Direct Financing Lease
C.
Operating Lease
D.
Finance Lease
How to approach this question
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.
Full Answer
A.Sales-Type Lease✓ Correct
A
Under ASC 842, if the leased asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term, it qualifies as a Sales-Type lease. This is one of the five criteria (the 'S' in OWNES).
Common mistakes
Thinking 'Finance Lease' applies to Lessors; ignoring the specialized asset criterion because the term/PV tests failed.
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