Asked by Adrian Trujillo on Mar 10, 2024
Verified
Any initial direct costs incurred by the lessor for a lease agreement that is classified as an operating lease should be
A) expensed in the same period that the expenditure is made
B) recorded as a prepaid asset and allocated to expense over the lease term
C) deferred and recognized as a reduction in the interest rate implicit in the lease
D) directly charged (debited) to Retained Earnings
A) expensed in the same period that the expenditure is made
B) recorded as a prepaid asset and allocated to expense over the lease term
C) deferred and recognized as a reduction in the interest rate implicit in the lease
D) directly charged (debited) to Retained Earnings
Initial Direct Costs
The expenditures that a company can directly attribute to acquiring a new lease or originating a loan.
Operating Lease
A lease agreement that allows for the use of an asset but does not convey rights similar to ownership of the asset.
Prepaid Asset
Costs that are paid for upfront and listed as assets prior to their utilization or consumption.
- Acquire knowledge about how initial direct costs are processed in accounting for different lease types.
Verified Answer
AV
Anne-Marie van Walraven
Mar 10, 2024
Final Answer :
B
Explanation :
Initial direct costs incurred by the lessor for an operating lease should be recorded as a prepaid asset and allocated to expense over the lease term. This is because the lessor is not considered the owner of the leased asset and therefore cannot capitalize the costs as an asset. The costs instead are considered as costs of arranging the lease and should be spread over the lease term.
Learning Objectives
- Acquire knowledge about how initial direct costs are processed in accounting for different lease types.