Question

Answer this question for a lease accounted for as a finance lease by lessee, and STL (sales type lease) by lessor.

a) At a signing, only the lessee records a JE involving the asset under lease

b) Both parties record two JEs each year of the lease term, not counting the JE at signing

c) Both parties record only one JE each year of the lease term, not counting the JE at signing

d) Bot parties amortize (depreciate) the asset under lease for financial reporting purposes

c) Only the lessee amortizes (depreciates) the asset under lease for financial reporting purposes, over the lease term

Answer 1

a) No ,at the time of signing the agreement of finance lease :lessor records such transaction as sales by debiting the lease recievable account and by crediting the asset account .On the other hand lessee records it as purchase by debiting the asset and crediting the lease payable account.

Hence , we can conclude both lessor and lessee records the JE involving asset under lease.

b)No, Lessor records only one journal entry that is of receipt of lease rentals (with or without interest amount depending upon the situation)On the other hand lessee records two journal entries: one is of payment of lease rentals (with or without interest amount depending upon the situation) and another one is of amortizing the asset.

c)No, Only Lessor records one journal entry that is of receipt of lease rentals (with or without interest amount depending upon the situation)On the other hand lessee records two journal entries: one is of payment of lease rentals (with or without interest amount depending upon the situation) and another one is of amortizing the asset.

d) No, not both parties depreciates the assets instead only lessee records the depreciation in his books of accounts.

e) yes , Only lessee depreciates the assets under finance lease over the useful life of asset.Point to be noted : Generally asset is amortized over the useful life of the asset but in case it is not certain that lessee would keep the asset after the lease period ,in that case asset would be amortized at the lower of useful life of assets and the term of the leasing.