Question

Unearned interest revenue is

a. amortized to revenue over the lease term by using the effective interest method
b. recorded in both capital and operating leases
c. the difference between the net investment and the fair value of the property
d. the difference between the fair market value of the property and the cost of the property

Answer 1

Unearned interest revenue is recorded as income before it is earned. It is typically received upfront but is gradually recognized over time. Option A is the correct answer, as unearned interest revenue is amortized to revenue over the lease term using the effective interest method.

Step-by-step explanation:

Unearned interest revenue is recorded as income before it is earned. It refers to the interest that a company receives in advance but has not yet earned. This typically occurs in situations where a company receives payment for interest upfront, such as in the case of bonds or lease agreements.

For example, let's say a company issues bonds to raise capital. The company receives the cash upfront from the bond purchasers, but it must record the unearned interest revenue as a liability on its balance sheet until it is earned over time. As the company fulfills its obligation to pay interest to the bondholders, the unearned interest is gradually recognized as income.Therefore, option A is correct in this scenario. Unearned interest revenue is amortized to revenue over the lease term using the effective interest method.

Answer 2

Unearned interest revenue is recognized in leases and is the excess amount of total lease payments over the cost of the leased asset. It is amortized to revenue over the lease term using the effective interest method and can be recorded in both capital and operating leases.

Step-by-step explanation:

Unearned interest revenue is recognized in the context of leasing transactions where a lessor provides a lease to a lessee. Typically, it represents the excess amount of the total lease payments receivable over the cost or carrying amount of the leased asset. It's important to understand that unearned interest revenue accrues over the lease period and is recognized over time.

• Unearned interest revenue is not amortized to revenue over the lease term by using the effective interest method.
• It is recorded in both capital and operating leases.
• It is not necessarily the difference between the net investment and the fair value of the property.
• Unearned interest revenue is also not the difference between the fair market value of the property and the cost of the property.

Given the options provided, unearned interest revenue could be most accurately described as being amortized to revenue over the lease term by using the effective interest method, even though it is not the only way to characterize it.