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Lease classification

Monthly lease payments $500

Payment date Beginning of the month

Rate implicit in the lease 9.56%

Other □ Title to the automobile remains with Lessor Corp upon
lease expiration

□ The expected residual value of the automobile at the end
of the lease term is $19,000; Lessee Corp does not
guarantee the residual value of the automobile at the end
of the lease term
□ Lessee Corp pays for all maintenance of the automobile
separately from the lease
□ There are no initial direct costs incurred by Lessor Corp
□ Lessor Corp does not provide any incentives

How should Lessor Corp classify the lease?

Analysis

Lessor Corp should assess the lease classification using the criteria outlined in ASC 842-10-25-2 and
ASC 842-10-25-3.

Criteria Analysis

Transfer of ownership Ownership of the asset does not transfer to
Lessee Corp by the end of the lease term.

Purchase option which the lessee is reasonably At lease commencement, Lessee Corp is not
certain to exercise reasonably certain to exercise the purchase
option because it is at fair market value, which
does not provide a significant economic
incentive.

Lease term is for the major part of the remaining Lessee Corp is utilizing the asset for 50% of the
economic life of the asset economic life of the asset (3-year lease / 6-year
economic life), which is not deemed to be a
major part.

Sum of present value of lease payments and any The present value of the lease payments
residual value guarantee by the lessee amounts to (discounted at the rate Lessor Corp charges in
substantially all of the fair value of the underlying the lease of 9.56%) is $15,720.
asset
Therefore, the present value of the lease
payments amounts to approximately 52% of the
fair value of the leased asset
($15,720/$30,000), which is not deemed to be

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