Question

Identifying capital and operating leases

C4

Indicate whether the company in each separate case 1 through 3 has entered into an operating lease or a capital lease.

1.The lessor retains title to the asset, and the lease term is three years on an asset that has a five-year useful life.

2.The title is transferred to the lessee, the lessee can purchase the asset for $1 at the end of the lease, and the lease term is five years. The leased asset has an expected useful life of six years.

3.The present value of the lease payments is 95% of the leased asset’s market value, and the lease term is 70% of the leased asset’s useful life.

Answer 1