A is corrent. At the inception of a lease, the lessee records a lease liability if the lease is considered to be a capital lease. To be considered a capital lease, a lease must satisfy any one of the four criteria specified in ASC Topic 840. This lease does not satisfy any of the four criteria. The lease has no bargain purchase option and does not transfer title. The lease term is not 75% or more of the useful life (10 years out of 15 years is 67%) and the PV of the lease payments is not 90% or more of the FV of the asset [(6.76 x $50,000) / $400,000 = 84.5%]. Therefore, this is an operating lease, not a capital lease, and no liability is recorded at the lease’s inception.
B is incorrect. At the inception of a lease, the lessee records a lease liability if the lease is considered to be a capital lease. To be considered a capital lease, a lease must satisfy any one of the four criteria specified in ASC Topic 840. This lease does not satisfy any of the four criteria. The lease has no bargain purchase option and does not transfer title. The lease term is not 75% or more of the useful life (10 years out of 15 years is 67%) and the PV of the lease payments is not 90% or more of the FV of the asset [(6.76 x $50,000) / $400,000 = 84.5%]. Therefore, this is an operating lease, not a capital lease, and no liability is recorded at the lease’s inception.
C is incorrect. At the inception of a lease, the lessee records a lease liability if the lease is considered to be a capital lease. To be considered a capital lease, a lease must satisfy any one of the four criteria specified in ASC Topic 840. This lease does not satisfy any of the four criteria. The lease has no bargain purchase option and does not transfer title. The lease term is not 75% or more of the useful life (10 years out of 15 years is 67%) and the PV of the lease payments is not 90% or more of the FV of the asset [(6.76 x $50,000) / $400,000 = 84.5%]. Therefore, this is an operating lease, not a capital lease, and no liability is recorded at the lease’s inception.
D is incorrect. At the inception of a lease, the lessee records a lease liability if the lease is considered to be a capital lease. To be considered a capital lease, a lease must satisfy any one of the four criteria specified in ASC Topic 840. This lease does not satisfy any of the four criteria. The lease has no bargain purchase option and does not transfer title. The lease term is not 75% or more of the useful life (10 years out of 15 years is 67%) and the PV of the lease payments is not 90% or more of the FV of the asset [(6.76 x $50,000) / $400,000 = 84.5%]. Therefore, this is an operating lease, not a capital lease, and no liability is recorded at the lease’s inception.
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