Question

Which of the following is not a criterion of a capital lease?

a. The lease transfers ownership of the property to the lessee by the end of the lease term.

b. The present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property, net of lessor's investment tax credit.

c. The lease contains an option to purchase the leased property at a bargain price.

d. The lease contains an option to renew

e. The lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.

Answer 1

The criterion not associated with a capital lease is 'The lease contains an option to renew.' Capital leases are characterized by attributes such as transfer of ownership and lease duration as compared to the asset's economic life, not the renewability of the lease.

Step-by-step explanation:

The criterion that is not considered in classifying a lease as a capital lease is: The lease contains an option to renew.

A capital lease is defined by several key characteristics, but the option to renew the lease is not one of them. Instead, the four main criteria used to determine a capital lease include:

1. The lease transfers ownership of the property to the lessee by the end of the lease term.
2. The present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property, excluding lessor's investment tax credit.
3. The lease contains an option to purchase the leased property at a bargain price.
4. The lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.

These criteria are designed to differentiate between leases that are effectively purchases and those that are true rental agreements. A capital lease is treated like an asset on a company's balance sheet, rather than as a rental expense, which is why understanding these criteria is crucial for accurate financial reporting and compliance with accounting standards.