What criteria classify a lease as a sales-type lease under ASC 842?

• A. The lease transfers ownership to the lessee by the end of the term, contains a bargain purchase option, or the lease term is for 75% of the asset's economic life.
• B. The lease transfers ownership to the lessee by the end of the term only.
• C. The lease term is for 12 months or less.
• D. The asset remains with the lessor at the end of term.

Answer: (B)

This item tests how ASC 842 determines when a lease is classified as a sales-type lease for a lessor. A sales-type lease is one where the lessor treats the lease as a sale of the asset at the lease’s inception, with the lessee gaining ownership-like rights. The practical indicators include that ownership transfers to the lessee by the end of the term, or the lessee has a bargain purchase option, or the lease term covers a major portion of the asset’s economic life (often about 75%). Among the given choices, the statement that ownership transfers to the lessee by the end of the term best represents the primary signal of a sales-type lease, which is why it’s the best choice. Short-term leases (twelve months or less) and leases where the asset remains with the lessor align with other lease classifications, such as operating or direct financing.