Definition of "Capital lease"

Rental in which the lessee obtains major property rights. Although not legally a purchase of property, theoretical substance governs over legal form and requires that the leased property be recorded as an asset on the lessees books. The asset equals present value of the minimum lease payments and the present value of the bargain purchase option. A capital lease exists if any one of the following four criteria is met: (1) the lease transfers ownership of the property to the lessee at the end of the lease term; (2) there is a bargain purchase option; (3) the lease term is 75% or more of the life of the property; and (4) the present value of minimum lease payments equals or exceeds 90% of the fair market value of the property.

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