In a lease that is appropriately recorded as a direct-financing lease by the lessor, the unearned income
A) should be amortized over the period of the lease using the effective interest method.
B) should be amortized over the period of the lease using the straight-line method.
C) does not arise.
D) should be recognized at the lease's expiration.

Question

Quizplus · Accepted Answer

In a direct-financing lease, the lessor records the lease as a sale, recognizing both a lease receivable and unearned income on the balance sheet. The unearned income should be amortized over the period of the lease using the effective interest method to determine a constant periodic rate of return on the outstanding lease receivable.

In a Lease That Is Appropriately Recorded as a Direct-Financing