Question

. A lessor will record interest income if the lease to its lessee is classified as

a. A capital lease

b. An operating lease

c. Either a capital or an operating lease.

Answer 1

a. A capital lease

In accounting for an operating lease, the lessee doesn't record either the leased asset or the lease
liability on the balance sheet, and normally charges each lease payment to rent expense.

In contrast, a capital lease transfers to the lessee substantially all of the risks and rewards relating
to the ownership of the property. Accordingly, the lessee accounts for a capital lease by
recording the leased property as an asset and establishing a liability for the lease obligation. The
leased asset is subsequently depreciated, and interest expense is accrued on the lease liability.