ExpertMedium1 markMultiple Choice
CPA · Question 47 · Area III: Select Transactions
Which of the following is a characteristic of a 'Finance Lease' for a lessee?
Which of the following is a characteristic of a 'Finance Lease' for a lessee?
Answer options:
A.
The lease term is 50% of the economic life.
B.
The present value of payments is 60% of fair value.
C.
The lease grants an option to purchase the asset that the lessee is reasonably certain to exercise.
D.
The asset is fungible and can be used by the lessor after the lease.
How to approach this question
OWNES mnemonic for Finance Lease: Ownership transfer, Written purchase option (certain), Net PV (90%), Economic life (75%), Specialized asset.
Full Answer
C.The lease grants an option to purchase the asset that the lessee is reasonably certain to exercise.✓ Correct
A purchase option that is reasonably certain to be exercised classifies the lease as a Finance Lease.
Common mistakes
Forgetting the 'reasonably certain' requirement for the option.
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