Final answer:
Depreciation expense by a lessee is based on whether the lease is classified as operating or finance. Operating leases recognize rent expenses, while finance leases involve depreciation and interest expenses. The classification affects the lessee's financial statements and obligations.
Step-by-step explanation:
Depreciation expense by the lessee in a lease where the property reverts to the lessor is either an operating lease or a finance (capital) lease. In an operating lease, the lessee records the lease payments as an expense over the lease term which typically does not lead to ownership.
On the other hand, in a finance lease, the lessee amortizes the asset and recognizes interest and depreciation expenses during the lease term as the lessee assumes the risks and rewards of ownership even though the property reverts back to the lessor at the end of the lease term.
In the context of the provided information regarding lease termination, if the lease is not terminated appropriately and the possession is not vacated, the lessee could incur additional rent and damages, thereby affecting the lessee's financial obligations.