A six-year Finance Lease entered into on December 31 of the current year specified equal annual lease payments due on December 31 of each year. The first annual lease payment, paid on December 31 this year, consists of which of the following?

1. Interest expense
2. Lease liability

a. Yes Yes
b. Yes No
c. No Yes
d. No No

Finance lease is an indirect way of providing a finance for an asset through a lease arrangement. The lessor acquires the asset and leases it out to the lessee , however , the lessee recognizes the leased asset as an asset in its book provided certain lease conditions are met.

The two components of finance lease obligation are Interest and the lease payment.

In this scenario , as the payment was made at the onset of the lease arrangement , no interest expense has accrued and none will be recognized. The first lease payment made will reduce the lease liability of the asset as agreed in the arrangement. .

andromache andromache · Answer 2 · 2021-12-16T10:33:24+01:00

The correct option is c. No Yes.

The following information should be considered:

Under the effective-interest method, interest should be recorded to account for a change in value because of the passage of time.
Given that the first payment should be made at the inception of the lease, where no time has passed.
Thus, the first payment decreased the lease liability, but no interest is recognized.

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