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On December 31, 2013, our company signed a lease for some equipment having an eight-year useful...

Question:

On December 31, 2013, our company signed a lease for some equipment having an eight-year useful life. The lease payments are made annually, beginning at the signing date. Title does not transfer to us, so the equipment will be returned to the lessor on December 31, 2020. There is no bargain purchase option. In this situation, our company:

1) Is the lessee in a capital lease.

2) Is the lessee in a sales-type lease.

3) Is the lessor in a capital lease.

4) Is the lessor in a sales-type lease.

Accounting for Leases:

A lease occurs when one party allows another party to use an asset for a period of time in exchange for a cash payment. The lease can be classified as operating, capital, or sales-type depending on the terms of the lease. The new accounting standards require all leases to be listed on the balance sheet.

Answer and Explanation:


Answer choice 1) Is the lessee in a capital lease.

Explanation:

Their company is the one leasing the equipment so they are known as the lessee. It is considered a capital lease if one of the three conditions are met which include a bargain purchase option, the life of the lease is 75% or more of the total useful life, or the present value of the lease payments are 90% or more of the assets fair value. In this situation the lease is for 7 of the 8 years of the assets useful life. This is considered a capital lease because it meets the second criteria.


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Accounting for Long-Term Liabilities

from Accounting 101: Financial Accounting

Chapter 10 / Lesson 6
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