\"A capital (or finance) lease and operating lease are recorded differently on t
ID: 2567301 • Letter: #
Question
"A capital (or finance) lease and operating lease are recorded differently on the balance sheet, but their effect on the income statement is the same." Do you agree? Explain.
A.
Yes. While capital (or financing) leases and operating leases are both recorded the same on the balance sheet, neither have any effect on the income statement.
B.
No. They are recorded differently on both the balance sheet and the income statement. The operating lease is not placed on the balance sheet while the capital (or finance) lease results in both an asset and a liability. The income statement treatment differs because the entire lease payment is treated as rent expense for an operating lease, while the amortization of the leased asset and the interest on the lease liability comprise the expense for a capital (finance) lease.
C.
No. A capital (or finance) lease and an operating lease are recorded the same on the balance sheet and neither have any effect on the income statement.
D.
No. They are recorded differently on both the balance sheet and the income statement. The capital lease is not placed on the balance sheet while the operating lease results in both an asset and a liability. The income statement treatment differs because the entire lease payment is treated as operating expense for a capital lease, while the amortization of the leased asset and the interest on the lease liability comprise the expense for an operating lease.
Explanation / Answer
Option B is correct
Capital lease effects
Balance Sheet:
At the inception of capital lease,the company leasing the equipment will record the equipment as an assetand the company also recognise the liability on the balance sheet by an amount equal to the present value of the minimum lease payments
The discounting rates will be used lower of the following rates
The lessors implied rate or the lessee incremeental borrowing rate
The leased asset is depreciates in a manner consisstent with the lessees usual policy for depreciating its operational assets
It can be over the life of the asset if ownership is going to transfer or term of the lease
Income Statement:
A capital lease payment includes two components one is interest expense while it is a part of income statement but ia not part of operational income and second component is principal peyment which ia not included in the income statement.Instead depreciation is included in the income statement as operating income.The interest income is higher in the firat few years of lease and is consistwnt with the amortized amount of loan.Total income over the life of the lease will be same for capital and operatting leases.
Operating lease effects
Balance Sheet:
No asset or liability are recorded
Income statement:
The operating lease payment will be treated as operating expense
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