Which of the following lease criteria would not qualify a lease as a capital lease? A. The lease contains an option to purchase the leased property at its fair market value B. The lease term is equal to or greater than 75% of the estimated economic life of the leased property C. The lease transfers ownership of the property to the lessee by the end of the lease term D. The present value of the minimum lease payments equals or exceeds 90% of the fair value of the leased property

A capital lease, also known as a finance lease, is a lease that has the characteristics of an asset purchase. According to the Financial Accounting Standards Board (FASB) and the International Financial Reporting Standards (IFRS), there are specific criteria that a lease must meet to be classified as a capital lease. If any one of these criteria is met, the lease is generally considered a capital lease:

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 to buy the leased equipment at a price that is significantly lower than the expected fair market value at the date the option becomes exercisable. 3. The lease term is equal to or greater than 75% of the estimated economic life of the leased property. 4. The present value of the minimum lease payments equals or exceeds 90% of the fair market value of the leased property.

Based on the options provided, option A does not qualify a lease as a capital lease. This is because an option to purchase the leased property at its fair market value is not considered a bargain purchase option. A bargain purchase option typically allows the lessee to purchase the leased asset at a price significantly less than its expected fair market value. It is the "bargain" element that contributes to the capital lease classification, not the option to purchase at fair market value itself.

Extra: To further explain the criteria for a capital lease:

1. Transfer of Ownership: If the lease agreement specifies that the lessee will own the leased asset at the end of the lease period, it is a strong indication that the lease is in essence a purchase of the asset.

2. Bargain Purchase Option: This option allows the lessee to buy the leased asset at a price significantly lower than the expected market value at the time when the option can be exercised. Since this can provide a strong financial incentive to purchase the asset, it suggests that the lease is similar to a purchase.

3. Lease Term: If the duration of the lease is for the major part of the asset's economic life (75% or more), the lessee is enjoying most of the benefits of ownership, which indicates that the lease is similar to a purchase agreement.

4. Present Value of Lease Payments: When the present value of the lease payments is equal to or exceeds 90% of the total fair value of the leased asset, it implies that the lessee is effectively paying for the full value of the asset, much like what would happen in a purchase on credit.

Typically, when a lease is classified as a capital lease, the lessee will record the leased asset and related lease liability on their balance sheet, simulating the effect of an asset purchase. This has significant implications for the financial statements of the lessee, which is why it is important to correctly classify the type of lease.