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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 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.

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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 ...

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