Final answer:
The test is called the capital lease test or the 90% test. It's one of the criteria used to determine if a lease should be classified as a capital lease; if the present value of minimum lease payments is 90% or more of the asset's fair value, the lease is capitalized.
Step-by-step explanation:
If the present value (PV) of the minimum lease payments equals or exceeds 90% of the fair value of the asset, the lease should be capitalized by the lessee. This test is called the capital lease test, sometimes known as the 90% test. A lease is considered a capital lease, according to the Financial Accounting Standards Board (FASB), if any one of the four criteria are met, one of which is the 90% test.
To determine whether a lease is a capital lease or an operating lease, the lessee applies several criteria as set forth by accounting standards. The criteria include whether the lease term is equal to or greater than 75% of the estimated economic life of the leased asset, the lease contains a bargain purchase option, ownership of the asset is transferred to the lessee at the end of the lease term, and the PV of minimum lease payments totaling 90% or more of the asset's fair value at the inception of the lease.