Choice "D" is correct. This lease will be accounted for as a capital lease because the lease term of five years is 75% of the economic life of six years. Assets acquired under capital (finance) leases are depreciated using the same theory as purchased assets. The purchase option is for " fair value." It is not a "bargain purchase option" therefore the assumption cannot be made that Douglas Co. will acquire the machine at the end of the lease period. As a result, the machinery should be depreciated over the five-year lease term under both IFRS & U.S. GAAP. Choice "b" is incorrect. Assets acquired under capital lease must be depreciated.
Choice "a" is incorrect. Although the machine has an economic life of six years, Douglas should depreciate the machinery over the five-year lease term because Douglas will most likely not keep the machinery after the lease term (there is no indication that Douglas will exercise the fair value purchase option).
Choice "c" is incorrect. Tax life is not used for financial accounting purposes.