Which of the following is not a condition which would require the recording of a lease contract as a capital lease?
A) The lease transfers ownership of the property to the lessee.
B) The lease contains a bargain purchase option.
C) The lease term is less than 75% of the economic life of the leased property.
D) The present value of the lease payments equals or exceeds 90% of the fair value of the leased property.

Question

Quizplus · Accepted Answer

According to GAAP, a lease contract should be recorded as a capital lease if it meets at least one of the four conditions. These conditions are: (1) the lease transfers ownership of the property to the lessee; (2) the lease contains a bargain purchase option; (3) the lease term is greater than or equal to 75% of the economic life of the leased property; and (4) the present value of the lease payments equals or exceeds 90% of the fair value of the leased property. As option C states that the lease term is less than 75% of the economic life of the leased property, it is not a condition that would require the recording of a lease contract as a capital lease. According to the Financial Accounting Standards Board (FASB), a lease contract must be recorded as a capital lease if it meets any of the following criteria: (A) the lease transfers ownership of the property to the lessee, (B) the lease contains a bargain purchase option, or (D) the present value of the lease payments equals or exceeds 90% of the fair value of the leased property. Option (C) is incorrect because the lease term being less than 75% of the economic life of the leased property is a condition that would require the recording of a lease as an operating lease, not a capital lease.

Which of the Following Is Not a Condition Which Would