ExpertMedium1 markMultiple Choice
CPA · Question 25 · Area II: Technical Accounting
Under ASC 842, how does a Lessee account for an Operating Lease on the Income Statement?
Under ASC 842, how does a Lessee account for an Operating Lease on the Income Statement?
Answer options:
A.
Recognize Interest Expense and Amortization Expense separately.
B.
Recognize a single Lease Expense on a straight-line basis.
C.
Recognize Rent Expense as payments are made.
D.
Recognize only Interest Expense.
How to approach this question
Lessee Finance Lease = Front-loaded expense (Interest + Amortization). Lessee Operating Lease = Straight-line expense (Single Lease Cost).
Full Answer
B.Recognize a single Lease Expense on a straight-line basis.✓ Correct
For an operating lease, the lessee recognizes a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis. On the balance sheet, the ROU asset is amortized by the difference between the straight-line expense and the interest accretion on the liability.
Common mistakes
Confusing Finance and Operating lease expense patterns.
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