Financial Accounting and Reporting-CPA Practice Exam

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Study for the Financial Accounting and Reporting-CPA Exam. Test your knowledge with multiple choice questions covering key topics. Prepare confidently for your certification!

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What is the minimum percentage of the leased property's economic life that must be covered in order for a lease to be classified as a capital lease?

  1. 75%

  2. 41%

  3. 50%

  4. 90%

The correct answer is: 75%

For a lease to be classified as a capital lease, it must meet specific criteria as outlined by accounting standards, including the percentage of the leased property's economic life that is covered by the lease term. The correct answer indicates that at least 75% of the economic life of the asset must be covered for the lease to qualify as a capital lease. This percentage is significant because capital leases are treated similarly to an asset purchase. The lessee effectively assumes the risks and benefits of ownership for the duration of the lease term, which justifies recording the asset on the balance sheet and recognizing liability against future lease payments. The higher threshold of 75% reflects the notion that if a substantial part of an asset's economic life is being committed to the lessee, it resembles outright ownership rather than a typical operating lease arrangement. Leases that do not meet this threshold would typically be classified as operating leases, where the asset and liability are not recorded on the balance sheet, thus impacting financial statements differently. Understanding this distinction in classification is crucial for accurately representing a company’s financial position.