CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Lease A does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 70% of the estimated economic life of the leased property. How should the lessee classify these leases?
A. Lease A: Operating lease; Lease B: Operating lease
B. Lease A: Capital lease; Lease B: Capital lease
C. Lease A: Capital lease; Lease B: Operating lease
Explanation: If the lease term equals or exceeds (>=) 75% of the asset's economic life, the lease should be categorized as a capital lease by the lessee.

User Contributed Comments 6

User Comment
gjwhite It depends which of the following classifications of the lease-back agreement is appropriate. 1)minor lease-back 2)more than minor but less than "substanitlly all" 3)substantially all.
andrewsutton Does it? Page 387 of Financial Statements uses 90% as the threshold of "substantially all". In that example, it is a test for when to book gain/loss on sale-leaseback. Is this the same as whether the lease is Capital or Operational?
Mago i thought capital lease had to have a bargain option at end of lease
charlie Mago: only one of four conditions needs to be met. bargain option is one of them.
gill15 I hate Il Mago....we need to trade him from the raptors
jjhigdon andrewsutton: The condition I believe you are referring to, and the one the question is meant to test/trick you on, is that a lease can be capitalized if the PV of the lease payments are at least 90% of the fair value to the lessor.
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