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A company (the lessor) buys a car and then leases it to one of its customers (lessee). Which of the following is correct?

  1. Unless the title eventually transfers to the lessee, the lease should be reported as an operating lease.
  2. If the car has a life of ten years and the lease is for eight years, the lease must be reported as a capital lease.
  3. If the lease is a capital lease, then the lessee must account for the contract as either a direct financing lease or a sales type lease.
  4. If the lessee is given the option to purchase the car at the end of the lease, both parties will account for the contract as a capital lease.

Leases Accounting Auditing Financial Reporting Finance
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Question added by Rehan Qureshi , Financial Consultant , Self Employeed
Date Posted: 2016/01/10
Upvote (3) Views (11) Followers (8) Answers (5) Report Question
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Rehan Qureshi
by Rehan Qureshi , Financial Consultant , Self Employeed

B. If the car has a life of ten years and the lease is for eight years, the lease must be reported as a capital lease.The FASB has established four criteria for a capital lease. If any one of these is met, then the lease has to be recorded as a capital lease:

  • The title transfers to the lessee
  • There is a bargain purchase option (a bargain is viewed as an option price that is significantly below expected fair value so that it is reasonable to expect the lessee to acquire the asset).
  • The life of the lease is% or more of the life of the asset.
  • The present value of the minimum lease payments is% or more of the fair value of the asset.

For a capital lease, the lessee only has one method of reporting (basically, the asset is being recorded as an acquisition using long-term financing). However, the lessor must classify the lease as a sales type lease or an operating lease based on certain factors.

Mohammad Alabassi
by Mohammad Alabassi , Chief Operations Officer , Class Worldwide Car Rental

Agree 100% with Mr. Rehan Qureshi Answer

Muhammad Usman Zubair
by Muhammad Usman Zubair , Manager Accounts -Projects , Bahria Town Construction Wing Phase-8

Correct Answer in option number3

Shahaad Kala
by Shahaad Kala , Financial Accountant , FedEx Express

All4 options are correct.

1. title does not transfer, hence it is an operating lease.

2. As the lease is for a period considered to be for a significant part of the duration of the lifetime of the asset, it should be considered as a capital lease.

3. If it is a capital lease, the lessee must account for this as a finance purchase or sales type lease.

4. As the lessee is given the option to purchase the asset at the end of the term, one must assume that the transfer will occur.

هيثم ناجى
by هيثم ناجى , محاسب اول , الفيوم لصناعة السكر

the correct answer is the second option

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