A lessor mistakenly treated a direct financing lease as an operating lease.How does this mistake impact the following at the end of the first year of the lease term? $\begin{array}{lcc}
&\textbf { Rent/Lease Revenue }&\textbf { Interest Revenue }\\hline
\text { a. } & \text { Overstated } & \text { Understated } \
\text { b. } & \text { Understated } & \text { Understated } \
\text { c. } & \text { Overstated } & \text { Overstated } \
\text { d. } & \text { Understated } & \text { Overstated }
\end{array}$

Question

Quizplus · Accepted Answer

The rent/lease revenue is overstated because operating leases recognize rental income evenly over the lease term, while direct financing leases recognize interest income. Interest revenue is understated because the lessor would not recognize the interest component separately in an operating lease.

A Lessor Mistakenly Treated a Direct Financing Lease as an Operating