CFA Practice Question

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CFA Practice Question

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.

User Contributed Comments 1

User Comment
kalps Criteria: 1. PV of MLPs >= 90% of fair value of asset 2. Bargain option 3. 75% ownership of the assets life 3. Ownership of lessee after term of lease
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