Respond to the following: a. What are the current criteria for capitalization identified in SFAS No. 13? b. How is the minimum lease payment calculated?
What will be an ideal response?
ANSWER:
a. The four criteria for capitalization are as follows:
(1) Title passes to the lessee at the end of the lease term.
(2) The lease contract contains a bargain purchase option.
(3) The lease term is at least 75 percent of estimated useful life (with the lease term covering more than 25 percent of the original economic life when new).
(4) The present value of minimum lease payments is 90 percent of the fair market value of the lease property at the inception of the lease, less any applicable investment tax credit.
b. The minimum lease payment is the sum of minimum rentals excluding executory costs, a bargain purchase payment if one exists, penalty payment for non-renewal if renewal is unlikely, and any guaranteed residual value at the end of the lease term—plus unguaranteed residual value for lessors.
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