Question

All of the following are correct regarding operating leases except:

a)Operating leases are generally short-term leases with a duration of less than 12 months.
b)Operating leases do not transfer ownership of the asset to the lessee.
c)Operating leases are often used for assets that have a relatively short economic life.
d)Operating lease expenses are treated as operating expenses on the income statement.
e)Operating leases are recorded on the lessee's balance sheet as both an asset and a liability.
Which statement above is not correct regarding operating leases, and why?

Answer 1

Statement e is incorrect as new accounting standards require operating leases to be recorded on the balance sheet as both an asset and a liability.

Step-by-step explanation:

The statement that is not correct regarding operating leases is 'e)Operating leases are recorded on the lessee's balance sheet as both an asset and a liability.' While this was true under previous accounting standards, after the Financial Accounting Standards Board (FASB) issued the new lease accounting standard ASC 842, both operating and finance leases must be recorded on the balance sheet. Operating leases were traditionally off-balance sheet financing, but with the new standards, the leases are recognized as lease liabilities with corresponding 'right-of-use' assets.