In a lease that is recorded as a direct financing lease by the lessor,unearned revenue
A) should be amortized over the period of the lease using the interest method.
B) should be amortized over the period of the lease using the straight-line method.
C) does not arise.
D) should be recognized in full at the inception of the lease.

Question

Quizplus · Accepted Answer

Unearned revenue arises when lease payments are received in advance. In a direct financing lease, the lessor records the unearned revenue as a liability and recognizes the lease revenue over the period of the lease. To do this, the interest method is used to amortize the unearned revenue, which means that the interest revenue is recognized over the lease term using the effective interest rate. This results in a higher revenue recognition in the early stage of the lease and a lower recognition in the later stages. Therefore, option A is the correct choice.

In a Lease That Is Recorded as a Direct Financing