Which of the following would most likely be recorded as a capital lease for accounting purposes?
A)The 15-year lease on the company's head office space.
B)The 3-year leases on the salesmen's cars.
C)The 20-year lease on a piece of manufacturing equipment.
D)The 48-month lease on the office photocopier.

Question

Quizplus · Accepted Answer

A capital lease is recognized as a purchase of an asset, and therefore must meet one of the following criteria: (a) the lease transfers ownership of the asset to the lessee by the end of the lease term; (b) the lease contains an option to purchase the asset at a bargain price; (c) the lease term is equal to 75% or more of the estimated economic life of the asset; or (d) the present value of the lease payments is equal to or greater than 90% of the fair value of the asset. Option C is the only choice that meets any of these criteria, as the 20-year lease on a piece of manufacturing equipment likely meets the third criterion. Therefore, it is most likely to be recorded as a capital lease.

Which of the Following Would Most Likely Be Recorded as a Capital