A capital (or finance) lease and operating lease are recorded differently on the

Question

A capital (or finance) lease and operating lease are recorded differently on the balance sheet, but their effect on the income statement is the same." Do you agree? Explain. A. No. A capital (or finance) lease and an operating lease are recorded the same on the balance sheet and neither have any effect on the income statement. B. No. They are recorded differently on both the balance sheet and the income statement. The operating lease is not placed on the balance sheet while the capital (or finance) lease results in both an asset and a liability. The income statement treatment differs because the entire lease payment is treated as rent expense for an operating lease, while the amortization of the leased asset and the interest on the lease liability comprise the expense for a capital (finance) lease. C. Yes. While capital (or financing) leases and operating leases are both recorded the same on the balance sheet, neither have any effect on the income statement. D. No. They are recorded differently on both the balance sheet and the income statement. The capital lease is not placed on the balance sheet while the operating lease results in both an asset and a liability. The income statement treatment differs because the entire lease payment is treated as operating expense for a capital lease, while the amortization of the leased asset and the interest on the lease liability comprise the expense for an operating lease.

Explanation / Answer

From the above mentioned options, Option B) is correct.

No, the statement is not correct, Capital lease and operating lease are recorded differently on both the balance sheet and the income statement. The operating lease is not placed in the balance sheet while the capital (or finance) lease results in both an asset and a liability. The income statement treatment differs because the entire lease payment is treated as rent expense for an operating lease, while the amortization of the leased asset and the interest on the lease liability comprise the expense for a capital (finance) lease.

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