If the lessee and the lessor use different interest rates to account for a capital lease,then
A) the lease will never be accounted for as a capital lease by the lessee.
B) total expenses (or revenues)will be equal for both lessee and lessor.
C) total expenses (or revenues)will be different for the lessee and the lessor.
D) GAAP has been violated since the lessor and the lessee are not allowed to use different interest rates in accounting for capital leases.

Question

Quizplus · Accepted Answer

If the lessee and lessor use different interest rates to account for a capital lease, total expenses or revenues will be different for the lessee and the lessor. This is because the lessee will record the lease liability at present value using their incremental borrowing rate while the lessor records the lease receivable at present value using their implicit interest rate. The result is that the lessee will usually record higher total expenses (or lower total revenues) than the lessor.

If the Lessee and the Lessor Use Different Interest Rates