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Which of the following is not a criterion to use in determining whether a lessee should classify a lease as a finance lease?

a) Transfer of ownership at the end of the lease term
b) Bargain purchase option
c) Lease term is 75% or more of the asset's economic life
d) Present value of lease payments is less than 90% of the asset's fair value

User RonyLoud
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Final answer:

Transfer of ownership at the end of the lease term is not a criterion used to classify a lease as a finance lease. The criteria to use include bargain purchase option, lease term, and present value of lease payments.

Step-by-step explanation:

The correct answer is a) Transfer of ownership at the end of the lease term. This is not a criterion to use in determining whether a lessee should classify a lease as a finance lease. A finance lease is a type of lease where the lessee has substantially all the risks and rewards of ownership and is therefore considered to be effectively financing the purchase of the leased asset.

The criteria to use in determining whether a lease should be classified as a finance lease include:

  1. Bargain purchase option: If the lessee has the option to purchase the asset at a price that is significantly below its fair value at the end of the lease term, it is an indicator that the lease should be classified as a finance lease.
  2. Lease term: If the lease term is for a major part of the economic life of the asset, typically 75% or more, it is an indicator that the lease should be classified as a finance lease.
  3. Present value of lease payments: If the present value of the minimum lease payments, excluding any guarantee or residual value, is equal to or greater than 'substantially all' of the fair value of the asset, it is an indicator that the lease should be classified as a finance lease.

Therefore, options a) Transfer of ownership at the end of the lease term, and d) Present value of lease payments is less than 90% of the asset's fair value, are not criteria used to classify a lease as a finance lease.

User Colin Cochrane
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