Question

Which of the following statements is correct?

A. In a direct-financing lease, initial direct costs are added to the net investment in the lease.
B. In a sales-type lease, initial direct costs are expensed in the year of incurrence.
C. For operating leases, initial direct costs are deferred and allocated over the lease term.
D. All of these answers are correct.

Answer 1

In a direct-financing lease, initial direct costs are added to the net investment in the lease. In a sales-type lease, initial direct costs are expensed in the year of incurrence. For operating leases, initial direct costs are deferred and allocated over the lease term. The correct statement is D. All of these answers are correct.

Step-by-step explanation:

In a direct-financing lease, initial direct costs are added to the net investment in the lease. This means that the costs are capitalized and included in the cost of the leased asset. On the other hand, in a sales-type lease, initial direct costs are expensed in the year of incurrence. These costs are recognized as expenses and deducted from revenue in the same period.

For operating leases, initial direct costs are deferred and allocated over the lease term. This means that the costs are spread out and recognized as expenses over time rather than being immediately expensed.

Therefore, the correct statement is D. All of these answers are correct.