Question from Financial Management Theory and Practice Financial Accounting Stan

Question

Question from Financial Management Theory and Practice

Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the:

(a) residual value as a fixed asset.
(b) residual value as a liability.
(c) present value of future lease payments as an asset and also showing this same amount as an offsetting liability.
(d) undiscounted sum of future lease payments as an asset and as an offsetting liability.
(e) undiscounted sum of future lease payments, less the residual value, as an asset, and as an offsetting liability.

Explanation / Answer

To capitalize a lease one must take the PV of the lease payments and capitalize that amount as both and asset and liability on the balance sheet. Thus the answer is C. Hope this helps!

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