Draper Corp

question 28

Multiple Choice

Draper Corp. leased a new building and land from Baylor Leasing Inc. for 25 years. At the inception of the lease the building and land have fair market values of $200,000 and $25,000, respectively. The building has an expected economic life of 30 years. Which of the following statements is correct regarding Draper's treatment of the lease?

• A) Draper should treat the lease as a capital lease even though there is no bargain purchase option and no automatic transfer of ownership at the termination of the lease.
• B) Draper should treat the lease as a capital lease only if there is either a bargain purchase option or an automatic transfer of ownership at the termination of the lease.
• C) Draper should treat the lease as a capital lease provided that the land and building are recorded in separate asset accounts and accounted for separately.
• D) Draper should treat the lease as a capital lease only if Baylor treats the transaction as a leveraged lease.

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