Capital leases are economically similar to purchasing assets with funds obtained from issuing long-term bonds and result in similar accounting.

Question

Quizplus · Accepted Answer

Capital leases are a type of financing arrangement where the lessee obtains the right to use an asset for a period of time in exchange for regular lease payments that cover the cost of the asset plus interest charges. Economically, this is similar to purchasing an asset with funds obtained from issuing long-term bonds. The accounting treatment for capital leases is similar to that of purchased assets, as both involve recognizing the asset on the balance sheet and depreciating it over its useful life while also recognizing interest expense on the liability incurred to finance the asset.

Capital Leases Are Economically Similar to Purchasing Assets with Funds