Question

Before signing a lease, a company reports total assets of $500,000 and total liabilities of $300,000. The company then signs a 30-month lease for equipment with payments of $922.21 each month. The lease payments have a present value of $25,000. After recording the inception of the lease, the company would report which of the following?

a) Increase in assets and liabilities.
b) No change in assets and liabilities.
c) Increase in assets only.
d) Increase in liabilities only.

Answer 1

After recording the inception of the lease, the company would report an increase in assets only (C).

Step-by-step explanation:

Upon signing the lease, the company would increase its assets but not its liabilities. The lease payments' present value of $25,000 represents the right-of-use asset, increasing the total assets on the balance sheet. However, since the lease is an operating lease, the liability is not recorded on the balance sheet, resulting in an increase in assets only.

In accounting for leases, the right-of-use asset is recognized on the balance sheet as the lessee's asset, representing the future lease payments. However, operating leases typically do not lead to the recognition of a corresponding liability on the balance sheet. Thus, the company would not increase its liabilities when recording the inception of this lease.

This scenario represents a typical treatment of operating leases under accounting standards, where the company reports an increase in assets (right-of-use asset) but no change in liabilities due to the nature of the lease.

The correct answer is still: c) Increase in assets only.