Firms Account for Leases Using Either the Operating Lease Method

question 244

Multiple Choice

Firms account for leases using either the operating lease method or the capital (finance) lease method.Which of the following is not true?

• A)The capital, or finance, lease method treats leases equivalent to installment purchases or sales, where the lessee borrows funds from the lessor to purchase the asset and the lessor recognizes profit at the time of sale.
• B)The lessor records the leased asset and the lease liability on the balance sheet at the present value of the contractual cash flows at the time of signing the lease.
• C)The lessee amortizes the leased asset, similar to recognizing depreciation on buildings and equipment.
• D)The lessee recognizes interest expense on the lease liability, similar to recognizing interest expense on long-term notes or bonds.
• E)The lessor records the signing of a capital lease the same as if the lessor sold the leased asset for an installment note receivable.

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Definitions:

Perpetual Inventory System

This accounting practice immediately logs the sale or acquisition of inventory via computerized point-of-sale systems and software for managing enterprise assets.

Accounts Payable

Short-term debts or obligations a company owes to its suppliers or creditors for goods and services received.

Sales Returns and Allowances

Deductions from a company's sales revenue that account for returned goods and discounts or allowances given to customers.

Purchase Discounts

Reductions in the purchase price of goods, services, or assets, usually offered as an incentive for prompt payment.