Question

At the inception of a capital lease agreement for a piece of equipment used in governmental operations:

a) The lessor assumes all maintenance costs
b) The lessee records a liability and an asset
c) The lease is automatically renewed
d) The equipment becomes government property

Answer 1

When a government enters a capital lease agreement for equipment, the lessee must record both a liability and an asset on their balance sheets, reflecting the lease as if it were a purchase. option b is answer

Step-by-step explanation:

At the inception of a capital lease agreement for a piece of equipment used in governmental operations, the correct statement is: b) The lessee records a liability and an asset. This reflects the responsibility of the lessee to record the leased asset on their balance sheet as if it were a purchase, as well as the obligation to make lease payments over time being reflected as a liability.

The lease payments themselves are considered fixed costs during the term of the lease. The lease agreement does not automatically imply that a) the lessor assumes all maintenance costs, c) the lease is automatically renewed, or d) the equipment becomes government property. option b is answer

Answer 2

The lessee records a liability and an asset at the inception of a capital lease because it reflects the transfer of substantial risks and rewards of ownership, adhering to accounting standards.Therefore, the correct answer is b) The lessee records a liability and an asset.

Step-by-step explanation:

At the inception of a capital lease agreement for a piece of equipment used in governmental operations, the lessee records a liability and an asset. This is because a capital lease transfers substantially all the risks and rewards incidental to ownership of the leased asset to the lessee.

According to accounting standards, the lessee recognizes both a liability for future lease payments and an asset representing the right to use the leased property. The liability is recorded on the balance sheet as the present value of future lease payments, discounted at the interest rate implicit in the lease or, if that rate cannot be readily determined, at the lessee's incremental borrowing rate.

Simultaneously, the lessee recognizes an asset, typically measured at the lower of the present value of minimum lease payments or the fair value of the leased asset. This asset reflects the right to use the leased property over the lease term.

In summary, the lessee's recognition of a liability and an asset at the inception of a capital lease is a fundamental accounting principle that accurately reflects the economic substance of the transaction.

It ensures transparency and provides stakeholders with a clear picture of the lessee's financial position, incorporating both the obligation arising from the lease and the corresponding right to use the leased asset.

Therefore, the correct answer is b) The lessee records a liability and an asset.