Lease involving plant asset with remaining useful life

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Reference no: EM131266617

On 1/1/14 two firms sign a 6-year lease involving a plant asset with a remaining useful life of 10 years on this date. The fair value of the asset is $700,000. The interest rate implicit in the lease is 10% and the annual lease payments of $120,000 are due each Dec. 31. The contract allows the lessee to purchase the asset at the end of the lease term for a price equal to the asset s fair value at that time. The asset reverts to the lessor at the end of the lease term if the lessee does not exercise the purchase option. Choose the correct statement.

a. lessee accounts for the lease as an operating lease

b. lessee report $70,000 of interest expense for 2014

c. lessee accounts for the lease as an operating lease because the lease term is less than the useful life of the asset

d. lessee accounts for the lease as a capital lease because at least one of the capitalization criteria is met

e. lessee accounts for the lease as a capital lease because there is a purchase option.

Reference no: EM131266617

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