Almost all leases lasting more than a year must be included in the balance sheet by reporting the
A) residual value as a liability.
B) present value of future lease payments as an asset and also showing this same amount as an offsetting liability.
C) undiscounted sum of future lease payments as an asset and as an offsetting liability.
D) undiscounted sum of future lease payments, less the residual value, as an asset and as an offsetting liability.
E) residual value as a fixed asset.

Question

Quizplus · Accepted Answer

According to accounting standards, leases lasting more than a year are considered capital leases and therefore, the present value of future lease payments must be recorded as an asset and a corresponding liability. This treatment is in accordance with the concept of matching expenses with revenues, as the leased asset will generate revenues over the course of its useful life, and the related expenses should be recognized in the same period. Therefore, option B is the best choice as it accurately reflects the accounting treatment of leases.

Almost All Leases Lasting More Than a Year Must Be