Question

To classify a lease agreement as a capital lease it must include a noncancelable lease term and one or more of what four criteria?

Answer 1

A lease agreement is classified as a capital lease if it includes a noncancelable lease term and meets one or more of the following criteria: transfer of ownership, a bargain purchase option, lease term covering 75% of the asset's life, or lease payments that present 90% of the asset's value.

Step-by-step explanation:

To classify a lease agreement as a capital lease, it must include a noncancelable lease term and meet one or more of the following four criteria:

1. The lease transfers ownership of the property to the lessee by the end of the lease term.
2. The lease contains an option to purchase the property at a bargain price.
3. The lease term is equal to or greater than 75% of the estimated economic life of the leased property.
4. The present value of the lease payments equals or exceeds 90% of the total fair value of the leased property.

Only if one or more of these criteria are met can a lease be considered a capital lease for accounting purposes, which affects how the lease is reported in financial statements.