Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

-For a finance lease, an amount equal to the present value of the lease payments should be recorded by the lessee as a(n):
A) Asset and a liability.
B) Asset and a different amount should be recorded as a liability.
C) Liability and a different amount should be recorded as an asset.
D) Expense.

Question

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.
 
-For a finance lease, an amount equal to the present value of the lease payments should be recorded by the lessee as a(n):
A) Asset and a liability. 
B) Asset and a different amount should be recorded as a liability. 
C) Liability and a different amount should be recorded as an asset. 
D) Expense.

Quizplus · Accepted Answer

A finance lease is a type of lease in which the lessee assumes substantially all of the risks and rewards of ownership. As such, the lessee must recognize the leased asset as well as the obligation to make future lease payments on its balance sheet. The amount recognized should be equal to the present value of the minimum lease payments. Therefore, the best choice is A, where the amount is recorded as both an asset and a liability.

Refer to the Following Lease Amortization Schedule