In a lease that is recorded as a sales-type lease by the lessor, interest revenue Select...

In a lease that is recorded as a sales-type lease by the lessor, interest revenue
Select one:
a. Does not arise.
b. Should be recognized over the life of the lease by the effective interest method.
c. Should be recognized over the life of the lease by the straight-line method.
d. Should be recognized in full as revenue at the lease's inception.

Solutions

Expert Solution

Correct Answer :

Option(b) or Should be recognized over the life of the lease by the effective interest method is correct answer because unearned income is calculated by taking the difference between gross investment in the lease and present value of gross investment and this unearned income is amortized by using the effective interest method.

Incorrect answers:

Option(a) or interest revenue does not arise is incorrect answer because the effective interest method is used to recognized over the life of the lease.

Option(c) or should be recognized over the life of the lease by the straight-line method is incorrect answer because the effective interest method is recognized over the life of the lease.

Option(d) or should be recognized in full as revenue at the lease's inception is incorrect answer because interest revenue is used for amortizing the effective interest method.

So correct answer is option (b)

ekkarill92 answered 1 year ago

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