From the lessee's perspective, in the earlier years of a lease, the use of the
A) capital method will enable the lessee to report higher income, compared to the operating method.
B) capital method will cause debt to increase, compared to the operating method.
C) operating method will cause income to decrease, compared to the capital method.
D) operating method will cause debt to increase, compared to the capital method.

Question

Quizplus · Accepted Answer

In the earlier years of a lease, using the capital method (now referred to as finance lease under IFRS 16 and ASC 842) will result in the lessee recognizing both an asset and a liability on the balance sheet, thus increasing debt compared to the operating method, which does not initially recognize a liability.

From the Lessee's Perspective, in the Earlier Years of a Lease