a.

If any of the four criteria listed in the text for capitalizing a lease are met, the lease should

be accounted for as a capital lease rather than an operating lease.

1.  Maybe.  The problem does not state that ownership of the computer system is transferred to Carey, Inc. during the term of the lease, but it does state that the system was acquired.  Thus, it’s not clear whether title to the asset transferred.

2.Yes.  The option to purchase the computer system for $1 at the end of four years is a

    “bargain purchase option.”

3. Yes.  The 75% test is met because the lease term of 4 years is 100% of the economic life

     of the computer system.

4. Yes.  The 90% test is met because the present value of the lease payments is $10,197.95 which is 100% (rounded) of the $10,200 fair value of the asset.