Under ASC 842, how does a Lessee account for an Operating Lease on the Income Statement?

Answer options:

Recognize Interest Expense and Amortization Expense separately.

Recognize a single Lease Expense on a straight-line basis.

Recognize Rent Expense as payments are made.

Recognize only Interest Expense.

How to approach this question

Lessee Finance Lease = Front-loaded expense (Interest + Amortization). Lessee Operating Lease = Straight-line expense (Single Lease Cost).

Full Answer

B.Recognize a single Lease Expense on a straight-line basis.✓ Correct

For an operating lease, the lessee recognizes a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis. On the balance sheet, the ROU asset is amortized by the difference between the straight-line expense and the interest accretion on the liability.

Common mistakes

Confusing Finance and Operating lease expense patterns.

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