A capital lease is recorded in the accounting records of the lessee by an entry:
A)Debiting Rent Expense and crediting Cash each time a lease payment is made.
B)Debiting Cash and crediting Rental Revenue each time a lease payment is received.
C)Debiting an asset account and crediting a liability account for the present value of the future lease payments.
D)Debiting an asset account and crediting Sales for the present value of the future lease payments.

Question

Quizplus · Accepted Answer

A capital lease is a lease that qualifies as a purchase and is recorded as an asset on the lessee's balance sheet. To record a capital lease, the lessee should debit an asset account (such as Equipment) and credit a liability account (such as Capital Lease Obligation) for the present value of the future lease payments at the inception of the lease. This allocation splits the cash payment into its principal and interest components. The lease payments between principal and interest are recognized as reduction of the capital lease obligation and interest expense respectively.

A Capital Lease Is Recorded in the Accounting Records of the Lessee