D is corrent. Per ASC Topic 840, a lease is classified as a capital lease by the lessee if the lease terms meet any one of the following criteria: (1) transfer of ownership to the lessee by the end of the lease term; (2) bargain purchase option; (3) lease term greater than or equal to 75% of the economic life of the property; or (4) the present value of the minimum lease payments is greater than or equal to 90% of the property’s fair market value. Since the terms of Vail’s lease do not meet any of the criteria, the lease should be accounted for as an operating lease. Thus, Vail should not recognize the building as an asset. However, Vail should recognize the cost of leasehold improvements as assets because in an operating lease, these costs are capitalized and amortized over the shorter of their useful lives or the term of the lease.
A is incorrect. Per ASC Topic 840, a lease is classified as a capital lease by the lessee if the lease terms meet any one of the following criteria: (1) transfer of ownership to the lessee by the end of the lease term; (2) bargain purchase option; (3) lease term greater than or equal to 75% of the economic life of the property; or (4) the present value of the minimum lease payments is greater than or equal to 90% of the property’s fair market value. Since the terms of Vail’s lease do not meet any of the criteria, the lease should be accounted for as an operating lease. Thus, Vail should not recognize the building as an asset. However, Vail should recognize the cost of leasehold improvements as assets because in an operating lease, these costs are capitalized and amortized over the shorter of their useful lives or the term of the lease.
A is incorrect. Per ASC Topic 840, a lease is classified as a capital lease by the lessee if the lease terms meet any one of the following criteria: (1) transfer of ownership to the lessee by the end of the lease term; (2) bargain purchase option; (3) lease term greater than or equal to 75% of the economic life of the property; or (4) the present value of the minimum lease payments is greater than or equal to 90% of the property’s fair market value. Since the terms of Vail’s lease do not meet any of the criteria, the lease should be accounted for as an operating lease. Thus, Vail should not recognize the building as an asset. However, Vail should recognize the cost of leasehold improvements as assets because in an operating lease, these costs are capitalized and amortized over the shorter of their useful lives or the term of the lease.
A is incorrect. Per ASC Topic 840, a lease is classified as a capital lease by the lessee if the lease terms meet any one of the following criteria: (1) transfer of ownership to the lessee by the end of the lease term; (2) bargain purchase option; (3) lease term greater than or equal to 75% of the economic life of the property; or (4) the present value of the minimum lease payments is greater than or equal to 90% of the property’s fair market value. Since the terms of Vail’s lease do not meet any of the criteria, the lease should be accounted for as an operating lease. Thus, Vail should not recognize the building as an asset. However, Vail should recognize the cost of leasehold improvements as assets because in an operating lease, these costs are capitalized and amortized over the shorter of their useful lives or the term of the lease.
