Which of the following would indicate that the lessee should not classify a lease as a finance lease under ASC 842?
A) The fair value of the leased asset is $100,000 and the present value of the minimum lease payments is $95,000.
B) The lease provides for no unguaranteed salvage value.
C) The lessee has the option to purchase the leased asset in 4 years for $2 when the asset's salvage value is expected to be $20,000.
D) The asset's useful life is 20 years; a 4-year lease occurs when the asset is 26 years old.

Question

Quizplus · Accepted Answer

Under ASC 842, a lease should not be classified as a finance lease by the lessee if it does not meet any of the five criteria set forth for such classification. One of these criteria is that the lease term is for the major part of the remaining economic life of the underlying asset. If the asset's useful life is 20 years and the lease occurs when the asset is already 26 years old, the lease term does not cover a major part of the asset's economic life, indicating it should not be classified as a finance lease.

Which of the Following Would Indicate That the Lessee Should