Question

Where a lessor incurs initial direct costs in establishing a lease agreement, how are these costs to be accounted for?

a. Expensed immediately
b. Capitalized and amortized over the lease term
c. Ignored in financial statements
d. Recorded as liabilities

Answer 1

When a lessor incurs initial direct costs in establishing a lease agreement, these costs are capitalized and amortized over the lease term.

Step-by-step explanation:

When a lessor incurs initial direct costs in establishing a lease agreement, these costs are typically capitalized and amortized over the lease term. This means that the costs are recorded as an asset on the balance sheet and gradually expensed over time.

For example, if a company incurs $10,000 in direct costs to establish a lease agreement with a term of 5 years, the company would record $10,000 as an asset and then amortize $2,000 each year over the lease term.

The purpose of capitalizing and amortizing these costs is to properly match the expenses with the corresponding revenue generated from the lease agreement.