At lease inception for a capital lease, which entry would correctly reflect the liability associated with the asset?

At lease inception for a capital lease, which entry would correctly reflect the liability associated with the asset?

• A. Credit Lease Payable $3,500
• B. Debit Lease Payable $3,500
• C. Debit PP&E $3,500
• D. Credit PP&E $3,500

Answer: (A)

When a capital lease is recognized at inception, you record both the asset and a corresponding liability for the present value of lease payments. The liability increases, and increases are recorded as credits. Therefore, the correct entry is to credit the lease payable for the lease amount, reflecting the obligation to make future payments. A matching debit would go to the asset (PP&E) to reflect the leased property being capitalized. The other options would either debit a liability (which would decrease it) or credit the asset instead of properly recognizing the liability.

When a capital lease is recognized at inception, you record both the asset and a corresponding liability for the present value of lease payments. The liability increases, and increases are recorded as credits. Therefore, the correct entry is to credit the lease payable for the lease amount, reflecting the obligation to make future payments. A matching debit would go to the asset (PP&E) to reflect the leased property being capitalized. The other options would either debit a liability (which would decrease it) or credit the asset instead of properly recognizing the liability.