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 right-of-use asset under a lease that qualifies as a finance lease because the lease contains a purchase option and the option is reasonably certain to be exercised, the amortization period used by the lessee must be:
A) The same period that was used by the lessor.
B) The economic life of the asset at the time the lease agreement took effect.
C) The term of the lease.
D) The term of the lease or the economic life of the asset, whichever is shorter.

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 right-of-use asset under a lease that qualifies as a finance lease because the lease contains a purchase option and the option is reasonably certain to be exercised, the amortization period used by the lessee must be:
A) The same period that was used by the lessor. 
B) The economic life of the asset at the time the lease agreement took effect. 
C) The term of the lease. 
D) The term of the lease or the economic life of the asset, whichever is shorter.

Quizplus · Accepted Answer

For a finance lease, especially when a purchase option is reasonably certain to be exercised, the lessee amortizes the right-of-use asset over the economic life of the asset. This reflects the expectation that the lessee will obtain ownership of the asset and thus should amortize its cost as if it were the owner from the start.

Refer to the Following Lease Amortization Schedule