301939 Flashcards
On January 1, Year 1, Frost Co. entered into a 2-year lease agreement with Ananz Co. to lease 10 new computers. The lease term begins on January 1, Year 1, and ends on December 31, Year 2. The lease agreement requires Frost to pay Ananz two annual lease payments of $8,000. The present value of the lease payments is $13,000. Which of the following circumstances would require Frost to classify and account for the arrangement as a finance lease?
Frost Co. does not have the option of purchasing the computers at the end of the lease term.
The fair value of the computers on January 1, Year 1, is $14,000.
Ownership of the computers remains with Ananz Co. throughout the lease term and after the lease ends.
The economic life of the computers is three years.
For a lease to be treated as a finance lease, only one of the five criteria must be met (FASB ASC 842-10-25-2). One of the criteria is that “the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments…equals or exceeds substantially all of the fair value of the underlying asset.” FASB ASC 842-10-55-2 uses the former 75% and 90% rules as benchmarks.
The present value of the lease payments ($13,000) exceeds 90% of the fair value of the computers (90% of $14,000 is $12,600).
