UGBA 120AB Lecture Notes - Lecture 4: Operating Lease, Situation Two, Finance Lease

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Situation 1: does the agreement specify that ownership of the asset transfers to the lessee, does the agreement contain a bargain purchase option, does the lease term constitute the major part of the expected. No economic life of the asset? (4 years/6 years x 100 = 66. 7% < 75%) Is the present value of the lease payments greater than or equal to substantially all of the fair value of the asset? (present value of an annuity due of : n=4, i=5% is 3. 72325. None of the five classification criteria are met, so this is an operating lease to the lessee. No to substantially all of the fair value of the asset? (present value of an annuity due of : n=4, i=6% is 3. 46511. At least one of the five classification criteria is met-- 2 in fact-- so this is a finance lease. Is the present value of the lease payments greater than or equal.

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