Classify a lessee lease under ASC 842 by testing transfer, purchase option, term, present value, and specialized nature indicators.
Classify a seven-year equipment lease under ASC 842. Economic life is eight years. There is no title transfer, no bargain purchase option, and payments have not been compared to fair value yet. Finance lease classification is triggered when any finance indicator shows the lessee has obtained substantially asset-purchase economics. The shortcut is to ask only whether title transfers. That misses term, present value, option, and specialized-asset indicators. Step 1 Test ownership transfer: no transfer at end of term. No indicator here, but classification is not finished. Step 2 Test purchase option: no option reasonably certain to be exercised. No indicator…
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