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A lease that meets at least one of the criteria outlined in paragraph 7 of FASB 13 and therefore, must be treated essentially as a loan for book accounting purposes. The four criteria are:

  1. the lease transfers ownership of the property to the lessee by the end of the lease term;
  2. the lease contains a bargain purchase option (i.e., a price which is sufficiently lower than the expected fair value of the property at the date the option becomes exercisable);
  3. the lease term is equal to 75% or more of the estimated economic life of the leased property; and
  4. the present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90% of the fair value of the leased property.

A Capital Lease is treated by the lessee as both the borrowing of funds and the acquisition of an asset to be depreciated: thus the lease is recorded on the lessee’s balance sheet as an asset and corresponding liability lease payable. Periodic lessee expenses consist of interest on the debt and depreciation of the asset.

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