Topics in long-term liabilities and equity

Question 1

What are the three requirements of a lease?

Answer 1

1. It must refer to a specific asset
2. It must give the lessee effectively all the asset’s economic benefits during the term of the lease
3. It must give the lessee the right to determine how to use the asset during the term of the lease

Question 2

What is at least one condition a lease must meet to be classified as a Finance lease?

Answer 2

1. Ownership of the leased asset transfers to the lessee
2. The lessee has the option to buy the asset and is expected to exercise it
3. The lease is for most of the asset’s useful life
4. The present value of the lease payments is greater than or equal to the asset’s fair value
5. The lessor has no other use for the asset