Chapter 18, Problem 1JC

Cases Judgment Cases

Judgment Case 1: Comparison of Lease Classification Rules

The lease rules discussed in this chapter have an effective date for fiscal years beginning after December 15, 2018. Under U.S. GAAP, the classification rules that were effective before that date are a bit different Specifically, the Group 1 rules were as follows.

1. 1. The lease transfers ownership of the properly to the lessee at the end of the lease term
2. 2. The lease contains a bargain purchase option, which allows the lessee to acquire the property at a price specified at the inception of the lease that is substantially lower than the expected fair market value of the property at the date the option can be exercised.
3. 3. The lease term is greater than or equal to 75% of the estimated economic life of the property.
4. 4. The present value of the minimum lease payments is greater than or equal to 90% of the fair market value of the property at the inception of the lease.

Required

1. a. Compare and contrast the old rules to the new rules.
2. b. Which set of rules require the most judgment?
3. c. What are the advantages and disadvantages of the old classification rules versus the new classification rules?
4. d. Which do you prefer? Explain your answer.