Question

The beginning of a six-year finance lease is december 31, 2024. the agreement specifies equal annual lease payments on december 31 of each year. for the lessee, the first payment on december 31, 2024, includes: interest expense reduction of the lease liability

a. no yes
b. yes no
c. yes yes
d. no no
multiple choice
O option a
O option b
O option c
O option d

Answer 1

The first payment of a finance lease typically includes a reduction of the lease liability, but it may not include an interest expense if interest has not had time to accrue by the date of the first payment.

Step-by-step explanation:

When it comes to finance leases, the initial payment typically includes both a reduction of the lease liability and an interest expense. When the first lease payment is made on December 31, 2024, accounting standards require that the payment be split into two parts: One part reduces the lease liability (the principal amount of the lease), and the other part represents the interest expense on the outstanding lease liability.

Since the payment on December 31, 2024, is the first payment, it is often the case that there is no interest expense, as interest has not had time to accrue. Therefore, the entire amount of the first payment would go towards reducing the lease liability.