Classification of Capital or Operating Lease: Clintonia Power Station leases fue

Question

Classification of Capital or Operating Lease:

Clintonia Power Station leases fuel rods for its nuclear power plant. The lease agreement does not contain a bargain purchase option or transfer of ownership. In addition, Clintonia Power Station leases the fuel rods for half of their economically productive life. A component of the present value of lease payments (5%) includes costs related to insurance of the rods paid by the lessor. Clintonia Power Station capitalizes the lease of the nuclear fuel rod since the present value of the lease payments equal $2,680,000, while the fair market value of the fuel rods is $3,000,000  

Explanation / Answer

The criteria for a capital lease can be any one of the following four alternatives:

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