Any initial direct costs incurred by the lessor for a lease agreement that is classified as an operating lease should be
A)expensed in the same period that the expenditure is made
B)recorded as a prepaid asset and allocated to expense over the lease term
C)deferred and recognized as a reduction in the interest rate implicit in the lease
D)directly charged (debited)to Retained Earnings

Question

Quizplus · Accepted Answer

Initial direct costs incurred by the lessor for an operating lease should be recorded as a prepaid asset and allocated to expense over the lease term. This is because the lessor is not considered the owner of the leased asset and therefore cannot capitalize the costs as an asset. The costs instead are considered as costs of arranging the lease and should be spread over the lease term.

Any Initial Direct Costs Incurred by the Lessor for a Lease