Question

Identify the two recognized lease accounting methods for lessees and distinguish between them.

Answer 1

Two lease accounting methods are:

(a) the operating method and (b) the capital-lease method.

a) Operating method - the leased asset remains the property of the lessor with the payment of a lease rental recognized as rental expense. Generally, the lessor pays the insurance, taxes, and maintenance costs related to the leased asset.

b) Capital-lease method - the lessee treats the lease transaction as if an asset were being purchased on credit; therefore, the lessee:

(1) sets up an asset and a related liability and

(2) recognizes depreciation of the asset, reduction of the liability, and interest expense.