Final Answer:
The lessor expenses initial direct costs in the year of incurrence in a b. operating lease.
Thus B is the correct option.
Step-by-step explanation:
In an operating lease, the lessor recognizes initial direct costs as expenses in the year they are incurred.
Operating leases are characterized by the lessor maintaining ownership of the leased asset, and the lessee essentially renting it for a specified period.
Unlike direct financing leases and sales-type leases, where the lessor retains a more significant involvement and financial interest in the leased asset, operating leases are more akin to rental agreements.
The choice of expensing initial direct costs in the year of incurrence for operating leases aligns with the accounting treatment of these leases as a straightforward rental arrangement.
The lessor treats the costs associated with negotiating and arranging the lease, such as commissions and legal fees, as immediate expenses rather than capitalizing them over the lease term.
This treatment is in contrast to direct financing leases and sales-type leases, where initial direct costs are typically capitalized and recovered over the life of the lease as part of the lease income.