Question

To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal?

a. Lessee uses a higher interest rate than that used by lessor.
b. Set the lease term at something less than 75% of the estimated useful life of the property.
c. Write in a bargain purchase option.
d. Use a third party to guarantee the asset's residual value.

Answer 1

To avoid leased asset capitalization, companies can use a higher interest rate, set a shorter lease term, and write in a bargain purchase option. d) Using a third party to guarantee the asset's residual value is not one of the ways to accomplish this.

Step-by-step explanation:

The way to avoid leased asset capitalization is by devising lease agreements that fail to satisfy any of the four leasing criteria. Three of the ways to accomplish this goal are:

1. Lessee uses a higher interest rate than that used by the lessor.
2. Set the lease term at something less than 75% of the estimated useful life of the property.
3. Write in a bargain purchase option.

However, using a third party to guarantee the asset's residual value is not one of the ways to avoid leased asset capitalization.