Accounting Dictionary

Capital Lease

A capital lease is treated as an asset by the lessee. The lessee depreciates it and records interest expense on the lease. In other words, the lessee treats the expenditure as if he bought the asset and is making payments on it.

Some criteria a lease must meet in order to be considered a capital lease include: 1) Does the lease term exceed 75% of the estimated useful life of the asset? 2) Does the present value of the lease payments exceed 90% of the original cost of the asset? 3) Does the lease keep the asset at the end of the term or is there a bargain sales price at the end of the term?

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