Financial Accounting and Reporting-CPA Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Prepare for the Financial Accounting and Reporting-CPA Exam. Boost your skills with multiple choice questions and gain insights with detailed explanations and hints to succeed in your CPA journey!

Start Multiple Choice Practice Test
Start Flash Cards

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

Which of the following is a criterion for a lease to qualify as a capital lease under US GAAP?

  1. Ownership transfers at the beginning of the lease

  2. Collectibility of lease payments is highly uncertain

  3. The lease term is at least 50% of the asset's economic life

  4. The present value of lease payments is at least 90% of the fair value of the leased property

The correct answer is: The present value of lease payments is at least 90% of the fair value of the leased property

A lease qualifies as a capital lease under US GAAP if it meets any one of several specific criteria. One of these criteria is that the present value of the lease payments is at least 90% of the fair value of the leased property at the commencement of the lease. This metric indicates that the lessee effectively acquires most of the economic benefits and risks associated with ownership of the asset, making the lease akin to a purchase in the eyes of financial accounting. When the present value of lease payments meets this threshold, it reflects substantial investment in the asset, which aligns with the fundamental principle that capital leases are treated similarly to owned assets on the balance sheet. This treatment impacts how liabilities and assets are recorded, reflecting a more accurate financial position of the lessee as it shows the obligation to make future payments as well as the underlying asset being utilized. Other criteria exist for classification as a capital lease to provide additional options for lessees, but the 90% criterion effectively underscores the significant commitment involved in the lease agreement. Thus, it aligns with the broader objectives of financial reporting, which include providing timely and relevant information for stakeholders.

More Questions Like This