{"id":20474,"date":"2025-06-14T13:34:28","date_gmt":"2025-06-14T13:34:28","guid":{"rendered":"https:\/\/gaviki.com\/blog\/?p=20474"},"modified":"2025-06-14T13:34:29","modified_gmt":"2025-06-14T13:34:29","slug":"damon-is-the-lessee-in-connection-with-a-finance-lease","status":"publish","type":"post","link":"https:\/\/gaviki.com\/blog\/damon-is-the-lessee-in-connection-with-a-finance-lease\/","title":{"rendered":"Damon is the lessee in connection with a finance lease"},"content":{"rendered":"\n

Damon is the lessee in connection with a finance lease. Damon will not record: Question 6 options: 1) Depreciation expense. 2) Amortization expense. 3) Interest expense. 4) A right-of-use asset.<\/p>\n\n\n\n

The correct answer and explanation is:<\/strong><\/mark><\/p>\n\n\n\n

Correct Answer: 1) Depreciation expense.<\/strong><\/p>\n\n\n\n

Explanation:<\/h3>\n\n\n\n

Under ASC 842<\/strong>, which governs lease accounting, a finance lease<\/strong> (formerly known as a capital lease) requires the lessee (in this case, Damon) to recognize both a right-of-use (ROU) asset and a lease liability<\/strong> on the balance sheet at the commencement date of the lease.<\/p>\n\n\n\n

What Damon will<\/em> record:<\/h3>\n\n\n\n
    \n
  1. Right-of-use (ROU) asset<\/strong> \u2013 Damon must record this to reflect his right to use the leased asset over the lease term.<\/li>\n\n\n\n
  2. Lease liability<\/strong> \u2013 This represents Damon\u2019s obligation to make lease payments.<\/li>\n\n\n\n
  3. Amortization expense<\/strong> \u2013 The ROU asset is amortized (not depreciated in the traditional sense) over the lease term, typically using the straight-line method. This is similar to how intangible assets are treated.<\/li>\n\n\n\n
  4. Interest expense<\/strong> \u2013 The lease liability is accounted for using the effective interest method, resulting in interest expense that is higher in earlier years and decreases over time.<\/li>\n<\/ol>\n\n\n\n

    Key Distinction:<\/h3>\n\n\n\n
      \n
    • Depreciation expense<\/strong> typically applies to owned<\/strong> tangible assets and is recorded by the owner of the asset<\/strong>.<\/li>\n\n\n\n
    • Since Damon does not own<\/strong> the underlying asset but only has the right to use<\/strong> it under a finance lease, he will not record depreciation expense<\/strong>.<\/li>\n\n\n\n
    • Instead, amortization expense<\/strong> is recorded for the right-of-use asset.<\/li>\n<\/ul>\n\n\n\n

      This accounting treatment helps reflect both the use of the asset and the financing component of the lease on Damon\u2019s income statement and balance sheet.<\/p>\n\n\n\n

      Summary:<\/h3>\n\n\n\n

      Damon, as a lessee under a finance lease<\/strong>, will record:<\/p>\n\n\n\n

        \n
      • A right-of-use asset \u2714<\/li>\n\n\n\n
      • A lease liability \u2714<\/li>\n\n\n\n
      • Amortization expense \u2714<\/li>\n\n\n\n
      • Interest expense \u2714
        \u274c But he will not<\/strong> record depreciation expense<\/strong>, making option 1 the correct answer.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"

        Damon is the lessee in connection with a finance lease. Damon will not record: Question 6 options: 1) Depreciation expense. 2) Amortization expense. 3) Interest expense. 4) A right-of-use asset. The correct answer and explanation is: Correct Answer: 1) Depreciation expense. Explanation: Under ASC 842, which governs lease accounting, a finance lease (formerly known as […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-20474","post","type-post","status-publish","format-standard","hentry","category-quiz-questions"],"_links":{"self":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/20474","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/comments?post=20474"}],"version-history":[{"count":1,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/20474\/revisions"}],"predecessor-version":[{"id":20475,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/20474\/revisions\/20475"}],"wp:attachment":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/media?parent=20474"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/categories?post=20474"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/tags?post=20474"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}