The Havel Widget Corporation (lessee) has just signed a 60-month lease on an asset with a six-year life. The lessor will retain the title to the property at the end of the lease, and the present value of the minimum lease payments is $470,000. The estimated fair value of the property is $600,000. Is this an operating lease?
A) No
B) Yes
C) Yes, if the company elects to treat the lease as an operating lease
D) More information is required to determine an answer.
A) No
This is a Finance lease. It meets one of the four criteria noted in SFAS #13: The lease term covers 75% or more of the expected useful life of the assets. 60 mos./72 mos. = 83%. Note that the lease does NOT satisfy the Title Transfer or Lease Payment Present Value tests.
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