An operating lease compared to a financial lease will result in:
A) higher net income in the early years and no difference in net income in the later years.
B) higher net income in the early years and lower net income in the later years.
C) lower net income in the early years and higher net income in the later years.
D) no difference as the classification of the lease has no effect on net income.

Question

Quizplus · Accepted Answer

An operating lease results in higher net income in the early years and lower net income in the later years due to the fact that lease payments are expensed rather than being capitalized as an asset. This leads to a front-loaded expense recognition pattern and thus higher net income in the early years. A financial lease, on the other hand, leads to a more even expense recognition pattern and thus no significant impact on net income over the years.

An Operating Lease Compared to a Financial Lease Will Result