Question

Which of the following lease conditions would result in a capital lease to the lessee?

a. The lessee will return the property to the lessor at the end of the lease term.
b. The lessee can purchase the property for $1 at the end of the lease term.
c. The fair market value of the property at the inception of the lease is $18,000; the present value of the minimum lease payments is $15,977.
d. The lease term is 70% of the property's economic life.

Answer 1

Option b and option c would result in a capital lease to the lessee.

Step-by-step explanation:

The lease conditions that would result in a capital lease to the lessee are option b and option c.

1. Option b: The lessee can purchase the property for $1 at the end of the lease term. This means that the lessee has a bargain purchase option, which is one of the criteria for a capital lease.
2. Option c: The fair market value of the property at the inception of the lease is $18,000; the present value of the minimum lease payments is $15,977. This means that the present value of the minimum lease payments exceeds 90% of the fair market value of the property, which is another criteria for a capital lease.