Firms account for leases using either the operating lease method or the capital (finance) lease method.Which of the following is not true?
A)The capital, or finance, lease method treats leases equivalent to installment purchases or sales, where the lessee borrows funds from the lessor to purchase the asset and the lessor recognizes profit at the time of sale.
B)The lessee records the leased asset and the lease liability on the balance sheet at the present value of the contractual cash flows at the time of signing the lease.
C)The lessee amortizes the leased asset, similar to recognizing depreciation on buildings and equipment.
D)The lessor recognizes interest expense on the lease liability, similar to recognizing interest expense on long-term notes or bonds.
E)The lessor records the signing of a capital lease the same as if the lessor sold the leased asset for an installment note receivable.

Question

Quizplus · Accepted Answer

The lessor does not recognize interest expense on the lease liability; instead, it is the lessee who recognizes interest expense on the lease liability. The lessor would recognize interest income or finance income from a capital lease, not an expense.

Firms Account for Leases Using Either the Operating Lease Method