What will be an ideal response?
Answer: In order to be classified as a capital lease, one of the following four criteria must be met:
1. Title must transfer to the lessee at the end of the lease.
2. The lease contains a bargain purchase option.
3. The lease term must be equal to 75% or greater to the economic life of the property.
4. The present value of the minimum lease payments must be equal to 90% or greater of the fair market value of the property at the inception of the lease.
If at least one of the four criteria are not met, the lease must be treated as an operating lease.