CFA Practice Question

CFA Practice Question

Which of the following are not sufficient conditions to classify a lease as a capital lease?
A. The lease rate exceeds the discount rate used by the firm for its projects or changing the classification of a lease from an operating to a capital lease will increase interest expense.
B. Ownership transferred to lessee at end of lease or lease contains bargain purchase option.
C. Lease term more than 75% of estimated economic life of leased property or present value of lease payments exceeds 90% of fair value of leased property.
Explanation: The idea of reclassifying operating to capital is whether the firm substantially has the risks and benefits of ownership. Lease rates, discount rates, increase in interest expense are not related to this issue.

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