The two accounting lease classifications listed are Operating and which other?

The two accounting lease classifications listed are Operating and which other?

• A. Capital Loan
• B. Operating
• C. Financial
• D. Revenue

Answer: (A)

In lease accounting, there are two main classifications for lessees: operating leases and finance leases, which are historically called capital leases. A capital (finance) lease means the lease transfers substantially all the risks and rewards of ownership, so the lessee records the leased asset and a liability, then depreciates the asset and recognizes interest expense. In contrast, an operating lease keeps the asset off the balance sheet and records lease expense over the term. The option given reflects the traditional label for the second category—capital lease—which is essentially the same concept as a finance lease used in modern GAAP; other choices don’t represent the paired classification.

In lease accounting, there are two main classifications for lessees: operating leases and finance leases, which are historically called capital leases. A capital (finance) lease means the lease transfers substantially all the risks and rewards of ownership, so the lessee records the leased asset and a liability, then depreciates the asset and recognizes interest expense. In contrast, an operating lease keeps the asset off the balance sheet and records lease expense over the term. The option given reflects the traditional label for the second category—capital lease—which is essentially the same concept as a finance lease used in modern GAAP; other choices don’t represent the paired classification.