Question

The methods of accounting for a lease by the lessee are

a. operating and capital lease methods.
b. operating, sales, and capital lease methods.
c. operating and leveraged lease methods.
d. none of these.

Answer 1

The accounting methods for leases by lessees are operating and capital lease methods, with operating leases as rental transactions and capital leases involving balance sheet recognition. (option a)

Step-by-step explanation:

The lessee can account for a lease using two primary methods: operating lease and capital lease. In the operating lease method, the lessee treats the lease payments as operating expenses, and the leased asset does not appear on the balance sheet. Conversely, the capital lease method involves recognizing the leased asset and corresponding liability on the balance sheet, with depreciation and interest expenses recorded in the income statement. Option (a) accurately reflects the common approaches to lease accounting adopted by lessees.

Understanding the distinction between operating and capital lease methods is essential for lessees in determining how to account for lease transactions. Operating leases are treated as off-balance-sheet operating expenses, while capital leases involve recognizing both assets and liabilities on the balance sheet. Therefore, the correct answer is (a) – operating and capital lease methods.