| Course | AC301 Intermediate Accounting II |
|---|---|
| Unit | Unit 6 |
| Paper type | Lease classification analysis |
| Length | About 660 words, 5 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | BS in Accounting |
| Updated | October 2026 |
Free sample paper for AC301 Unit 6
A Press That Meets One Test and a Building That Meets None: A Unit 6 Lease Classification Analysis
[Student Name]
Purdue University Global
AC301: Intermediate Accounting II
Unit 6 Lease Classification Analysis
[Instructor Name]
[Date]
Pressmark Printing, its lessors and every amount are composite; the present value factors are exact, and the standards and textbook cited are real.
The Two Leases
Press lease: five years, beginning January 1; $30,000 due every January 1; the press has a six-year economic life and a fair value of $150,000; the lessor's implicit rate, which Pressmark knows, is 6 percent; no purchase option; the press is a standard model the lessor can lease to other printers when the term ends.
Building lease: ten years, beginning January 1; $96,000 due every January 1; the building has a forty-year remaining life and a fair value of about $4,000,000; the implicit rate is not known, so Pressmark uses its incremental borrowing rate of 7 percent; no transfer of ownership and no purchase option.
Present Values
Press: $30,000 times the annuity-due factor for five periods at 6 percent, 4.46511, gives $133,953, which is 89.3 percent of fair value. Building: $96,000 times the annuity-due factor for ten periods at 7 percent, 7.51523, gives $721,462, which is 18.0 percent of fair value.
The Five Criteria
Meeting any single criterion below makes Pressmark the holder of a finance lease (Financial Accounting Standards Board, 2016).
1. Ownership passes to the lessee by the end of the term. Press: no. Building: no.
2. An option to buy that Pressmark is reasonably certain to use. Press: none. Building: none.
3. Pressmark controls the asset for a major share of its remaining life, a threshold practice usually sets at 75 percent. Press: five of six years, 83 percent, met. Building: ten of forty years, 25 percent, not met.
4. The present value of payments equals or exceeds substantially all of fair value, commonly read as 90 percent. Press: 89.3 percent, not met, narrowly. Building: 18.0 percent, not met.
5. The asset is built so narrowly for Pressmark that the lessor could not put it to any other use afterward. Press: no, a standard model. Building: no, a general industrial building.
The press is a finance lease on the strength of a single criterion, the term test, even though its payments fall just short of substantially all of fair value; one criterion met is enough, and none of the others has to come close.
Press: Finance Lease Measurement
Entry, January 1: Right-of-Use Asset, debit $133,953; Lease Liability, credit $133,953. First payment: Lease Liability, debit $30,000; Cash, credit $30,000. Liability after payment: $103,953.
December 31, Year 1: Interest Expense, debit $6,237 (6 percent of $103,953); Lease Liability, credit $6,237. Amortization Expense, debit $26,791; Right-of-Use Asset, credit $26,791, straight-line over the five-year term.
Year 1 expense: $33,028, split between interest and amortization, front-loaded because interest falls as the liability is paid down.
Building: Operating Lease Measurement
Entry, January 1: Right-of-Use Asset, debit $721,462; Lease Liability, credit $721,462. First payment: Lease Liability, debit $96,000; Cash, credit $96,000. Liability after payment: $625,462.
December 31, Year 1: Pressmark records a single lease cost of $96,000, straight-line. Underneath it, the liability grows by 7 percent interest, $43,782, and the asset falls by whatever remains of the $96,000 cost, $52,218, leaving both at $669,245.
Entry: Lease Expense, debit $96,000; Lease Liability, credit $43,782; Right-of-Use Asset, credit $52,218.
What Classification Changes
Both leases sit on the balance sheet, so classification no longer decides whether debt appears. It decides how the cost is reported. The press shows interest and amortization separately, with more expense early; the building shows one even lease cost inside operating expenses. On the cash flow statement, the press's principal payments are financing outflows, while the building's payments are operating outflows (Kieso et al., 2019). Under the international standard, both would be accounted for like the press, because it has a single model for lessees (International Accounting Standards Board, 2016).
References
Financial Accounting Standards Board. (2016). Leases (Topic 842) (Accounting Standards Update No. 2016-02). https://www.fasb.org
International Accounting Standards Board. (2016). IFRS 16 leases. IFRS Foundation. https://www.ifrs.org
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (17th ed.). Wiley.
AC301 Unit 6 instructions, in plain terms
Unit 6 of AC301 gives one or two leases and asks students to classify them and record the lessee's entries. Start with the terms of each lease: length, payments and timing, the asset's life and fair value, any purchase option or ownership transfer, and the rate. Say which rate discounts each lease: the lessor's own rate if Pressmark can find it, otherwise what Pressmark would pay a bank. Compute the present value of the payments. Test each lease against all five criteria, giving a verdict and a figure for each, and remember that one criterion met is enough. Record the right-of-use asset and lease liability at commencement. Carry each lease through its first year: interest and straight-line amortization for a finance lease, one level lease cost for an operating lease. Explain what classification changes. Cite ASU 2016-02 in APA 7.
How the AC 301 Unit 6 example is put together
The sample describes both leases, including that Pressmark knows the press lessor's 6 percent rate but not the building owner's, so it uses 7 percent for the building. A present value section applies annuity-due factors and gives each result as a share of fair value. The five criteria follow as a numbered list with a verdict for each lease, the press meeting only the term test. The highlighted sentence explains why a narrow miss on the payment test does not matter. The press section records $133,953, the first payment, $6,237 of interest and $26,791 of amortization. The building section records $721,462, the first payment, and a $96,000 lease cost split between $43,782 of accretion and $52,218 of asset reduction. A final section compares income statement and cash flow effects and notes that IFRS 16 uses one lessee model.
AC301 Unit 6 rubric: what earns full points
For this AC301 analysis, the classification of each lease is the heart of the grade, and graders expect all five criteria applied, not just the one that decides. The present value computation must use the right factor for payments in advance and the right rate. Commencement entries are checked for equal asset and liability. Year 1 entries are graded separately for each type: interest and amortization for the finance lease, and a single straight-line cost with the correct split for the operating lease. A student who explains why a near miss on one criterion does not change the outcome shows judgment. A discussion of how classification affects expense patterns and cash flow classification earns analytical credit. A numbered grid lets the grader tick off each criterion quickly. ASU 2016-02, and IFRS 16 if the paper draws the international contrast, are cited in APA 7 for the Purdue Global grader.
AC301 Unit 6 help from the desk
Lease problems often stop at the first criterion met and never test the rest, which costs points when the rubric asks for all five. Students also use an ordinary annuity factor for payments made in advance, understating the present value. Others discount at the lessee's borrowing rate even though the lessor's rate was given in the facts. The operating lease is sometimes recorded with separate interest and amortization lines, as if it were a finance lease. Some papers leave the operating lease off the balance sheet, a treatment that ended with the 2016 update. The 75 and 90 percent thresholds are treated as rules rather than as reasonable guides. The first payment is forgotten when computing Year 1 interest. If your problem also asks for the lessor's side, our team can classify the lease from both sides and record each set of entries.
Get an AC301 Unit 6 example written to your instructions
Classification can turn on a single fact, such as a renewal option, so the whole Unit 6 case helps: lease terms, payment timing, asset life, fair value, options and rates, with the rubric. The grid, both measurements and the first-year entries follow in 24-48h, and first custom samples cost nothing. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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AC301 Unit 6 questions, answered
Are the 75 and 90 percent thresholds rules or guidelines?
Guidelines. ASC 842 describes them as one reasonable approach to judging major part and substantially all, carried over from the older standard's bright lines. Most AC301 problems apply them as stated, and the sample does too, but it words its conclusions as judgments supported by the percentages rather than as mechanical results, which reads better to a grader who knows the standard.
Does the analysis cover the lessor's side as well?
Only when the problem asks. Lessors classify leases as sales-type, direct financing or operating using similar criteria, and some AC301 units assign both sides of one agreement. When they do, the sample adds a second grid and the lessor's entries, noting where the lessor's classification diverges from the lessee's, as it can when a third party guarantees the residual value.
Where can I find a free AC301 Unit 6 sample paper?
This page offers a complete AC301 Unit 6 lease classification analysis for a composite printer's press and building leases, with present values, all five criteria, commencement and Year 1 entries and APA 7 references.
Why does the AC301 Unit 6 analysis use two different rates?
Pressmark knows the 6 percent rate built into the press lease, so it uses that. The building owner's rate is not known, so the 7 percent Pressmark would pay to borrow is used instead.
Is the press lease in AC301 Unit 6 a finance lease if payments miss 90 percent?
Yes. The press lease runs five of the machine's six years, which meets the term criterion. One criterion is enough, so the 89.3 percent present value result does not change the outcome.