Under ASC 842, how does a Lessee account for the interest expense on a Finance Lease?

Answer options:

Interest is recognized on a straight-line basis over the lease term.

Interest is calculated using the effective interest method on the lease liability balance.

No interest expense is recognized; the entire payment is rent expense.

Interest is recognized only when payments are made.

How to approach this question

Distinguish Finance vs Operating Lease expense pattern. Finance = Interest (Effective Interest Method) + Amortization. Operating = Single Straight-Line Cost.

Full Answer

B.Interest is calculated using the effective interest method on the lease liability balance.✓ Correct

For a finance lease, the lessee recognizes interest expense on the lease liability using the effective interest method (carrying amount * discount rate) and amortization of the ROU asset (usually straight-line).

Common mistakes

Confusing with Operating Lease treatment.

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