Which of the following statements concerning leases is true?

Question:

Which of the following statements concerning leases is true?

A Capital leases are favored by lessees
B Present value is irrelevant in accounting for leases
C The appearance of the account, Leased Asset, on the balance sheet signifies an operating lease
D The portion of a lease liability expected to be paid in the next year is reported as a current liability

Answer:

The correct option is D The portion of a lease liability expected to be paid in the next year is reported as a current liability

A) Capital leases – The lease agreement in which the lessor agrees to transfer the ownership of a leased asset to the lessee after the completion of the lease period. In this type of lease ownership transfer to the lessee at the end of the lease period. It is not favored by the lessee or lessor. — HENCE INCORRECT

B) Present value is irrelevant in accounting for leases — It is relevant to recognize the initial lease liability and important to calculate for lease. — Hence INCORRECT

C) The appearance of the account, Leased Asset, on the balance sheet signifies an operating lease — INCORRECT since under operating lease assets are not recorded in the balance sheet. They are directly expensed on the income statement.

D) The portion of a lease liability expected to be paid in the next year is reported as a current liability — CORRECT Statement. The current portion of lease liability which is expected to be paid in next year or less than 12 months is reported as a current liability. The portion of more than 1 year is reported as a long-term liability. Hence this statement is correct.

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