Item1 1 points eBook Item 1 MC Qu. 05 In an operating lease in which... In an operating lease in which the asset’s economic life and lease term are different: Multiple Choice The lessor amortizes the leased asset over the term of the lease. The lessee amortizes the leased asset over the term of the lease at a straight-line amount. The lessee amortizes the leased asset at an amount that increases each period. The lessee amortizes the asset over its economic life.
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Why do you say we would prefer our leases to be classified as operating leases?" says your colleague in the accounting department. "I thought that with the new lease accounting rules, both operating and finance leases have to be included in our balance sheet." To aid in your explanation, you use Excel to chart the effect on the income statement of accounting for an upcoming lease transaction as a finance lease and as an operating lease. The transaction you're using in your explanation is a lease of equipment requiring four $100,000 payments, payable at the beginning of each of the four years. The payments are based on an interest rate of 10%. It's already been determined that you must classify the lease as a finance lease because the equipment's useful life is estimated to be six years, but you see this as a good opportunity to compare the two approaches. Below are the questions you will ask your colleague to consider when viewing the charts. 1. The interest expense of the finance lease in the third year of the four-year lease term is: 2. The amortization expense of the finance lease over the four-year lease term is: 3. The amortization expense of the operating lease over the four-year lease term is: 4. The total lease expense of the finance lease over the four-year lease term is: 5. The total lease expense of the operating lease over the four-year lease term is: 6. Other things being equal, the advantage of a lease being classified as an operating lease rather than as a finance lease is:
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