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    Classifying Leases as Capital or Operating

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    Indicate whether each of the following independent transactions is a capital (C) or operating (O) lease.

    a. __________ A firm signs a 5-year lease for equipment with a 7-year life.
    b. __________ A firm signs a lease for property with a fair market value of $20,000. The present value of the lease payments is $16,000.
    c. __________ A firm signs a lease for equipment which will allow the lessee to purchase the equipment at the end of the lease for one-half the fair market value.
    d. __________ A firm signs a 16-year lease for equipment with a 20-year life.
    e. __________ A firm signs a lease for property with a fair value of $90,000. The present value of the lease payments is $85,000.

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    Solution Preview

    Consequently the Financial Accounting Standards Board has ruled that a lease should be treated as an capital lease if it meets any one of the following four conditions -
    (a) if the lease life exceeds 75% of the life of the asset
    (b) if there is a transfer of ownership to the lessee at the end of the lease ...

    Solution Summary

    Indicate whether each of the following independent transactions is a capital (C) or operating (O) lease.

    a. __________ A firm signs a 5-year lease for equipment with a 7-year life.
    b. __________ A firm signs a lease for property with a fair market value of $20,000. The present value of the lease payments is $16,000.
    c. __________ A firm signs a lease for equipment which will allow the lessee to purchase the equipment at the end of the lease for one-half the fair market value.
    d. __________ A firm signs a 16-year lease for equipment with a 20-year life.
    e. __________ A firm signs a lease for property with a fair value of $90,000. The present value of the lease payments is $85,000.

    $2.49

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