Question

Under ASC 842, when accounting for a finance lease, what does the lessee do?

1) Recognizes a right-of-use asset and a lease liability
2) Recognizes a finance lease receivable and a finance lease payable
3) Recognizes a lease expense and a lease payable
4) Recognizes a lease receivable and a lease liability

Answer 1

In accounting for a finance lease under ASC 842, the lessee records a right-of-use asset and a lease liability on the balance sheet, reflecting their rights and obligations under the lease agreement.

Step-by-step explanation:

Under ASC 842, which is the accounting standard for lease transactions, when accounting for a finance lease, the lessee recognizes both a right-of-use asset and a lease liability on the balance sheet. Specifically, the lessee records the right-of-use asset as an asset, which represents their right to use the leased asset over the lease term, and the lease liability as a liability, which represents their obligation to make lease payments. Over the term of the lease, the lessee will amortize the right-of-use asset and accrete interest on the lease liability, while making cash payments to reduce the liability.

The correct answer to the student's question is therefore option 1): Recognizes a right-of-use asset and a lease liability.