ExpertMedium1 markMultiple Choice
CPA · Question 39 · Area II: Technical Accounting
Under ASC 842, how does a Lessee account for the interest expense on a Finance Lease?
Under ASC 842, how does a Lessee account for the interest expense on a Finance Lease?
Answer options:
A.
Interest is recognized on a straight-line basis over the lease term.
B.
Interest is calculated using the effective interest method on the lease liability balance.
C.
No interest expense is recognized; the entire payment is rent expense.
D.
Interest is recognized only when payments are made.
How to approach this question
Distinguish Finance vs Operating Lease expense pattern. Finance = Interest (Effective Interest Method) + Amortization. Operating = Single Straight-Line Cost.
Full Answer
B.Interest is calculated using the effective interest method on the lease liability balance.✓ Correct
B
For a finance lease, the lessee recognizes interest expense on the lease liability using the effective interest method (carrying amount * discount rate) and amortization of the ROU asset (usually straight-line).
Common mistakes
Confusing with Operating Lease treatment.
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