Norquist Company is planning to lease a machine from Smith Company for 3 years. The machine has an estimated life of 5 years. The lease will not transfer the machine's ownership to Norquist at the end of the lease, nor does the lease contain a bargain purchase option. The present value of the minimum lease payments is less than 90% of the machine's fair value. Norquist should account for the lease as a capital lease. True or False?

Correct Answer: False

None of the four capital lease criteria is satisfied by this lease. The lease term is only 60% of the economic life of the machine. The criterion requires that the lease term equal at least 75% of the asset's economic life. The other three criteria are explicitly mentioned above as not being satisfied.