ExpertMedium1 markMultiple Choice
CPA · Question 48 · Area III: Select Transactions
Which of the following criteria would cause a lessee to classify a lease as a Finance Lease?
Which of the following criteria would cause a lessee to classify a lease as a Finance Lease?
Answer options:
A.
The lease term is 60% of the economic life of the asset
B.
The present value of lease payments equals 95% of the fair value of the asset
C.
The asset is specialized but has an alternative use to the lessor
D.
The lease contains an option to purchase the asset that the lessee is not reasonably certain to exercise
How to approach this question
Recall 'OWNES' criteria: <br/>O - Ownership transfers. <br/>W - Written option to purchase (reasonably certain). <br/>N - Net present value (90% rule). <br/>E - Economic life (75% rule). <br/>S - Specialized asset (no alternative use). <br/>Any one met -> Finance Lease.
Full Answer
B.The present value of lease payments equals 95% of the fair value of the asset✓ Correct
A lease is a Finance Lease if the PV of lease payments amounts to substantially all (typically >90%) of the fair value of the underlying asset.
Common mistakes
Confusing the 75% life rule with the 90% FV rule.
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