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 lessee 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 differently than if the lessor sold the leased asset for an installment note receivable.

Question

Quizplus · Accepted Answer

The statement in option E is true, therefore it is not the correct answer. When a lessor signs a capital lease, they record it differently than if they sold the leased asset for an installment note receivable. The lessor does not record a sale under a capital lease. Instead, they continue to recognize the leased asset on their books and treat the lease payments as interest income and principal repayments on the lease receivable. Options A, B, C, and D are all true statements about how leases are accounted for using the capital lease method.

Firms Account for Leases Using Either the Operating Lease Method