Question

Crystal corporation makes $2,500 payments every month for leasing office equipment. Crystal recorded a lease payment as follows: Account Title Debit Credit Lease Payable _______ Interest Expense _______ Cash _______. Account Title Debit Credit Amortization Expense _______ Right-of-Use Asset _______. Crystal must have a(n):

1) Operating Lease
2) Finance Lease
3) Capital Lease
4) Sales-Type Lease

Answer 1

The most appropriate answer is (2) Finance Lease.

Step-by-step explanation:

The Crystal corporation’s entries for lease payments indicate they are dealing with an accounting scenario that involves separating the lease payments into interest expense and amortization expense. This separation suggests the lease is being treated as a capital item on Crystal's balance sheet, consistent with either a finance lease or a capital lease. Given the choices, the correct terms under the newer accounting standards would be an operating lease or a finance lease.

Operating leases do not commonly require the recording of interest or amortization expenses, as they are often treated as rental expenses. However, finance leases involve recognizing interest expense and amortization of the Right-of-Use Asset. Therefore,