Which statement best describes an operating lease?

Which statement best describes an operating lease?

• A. Ownership transfers at end of the lease
• B. The asset is capitalized on the balance sheet
• C. There is no intention for ownership to transfer
• D. Lease payments are expensed as incurred

Answer: (C)

Operating lease is defined by the absence of any expectation that ownership will transfer to the lessee. In this arrangement, the asset stays with the lessor, and the lessee simply uses it for a period of time in exchange for lease payments. Because ownership isn’t expected to transfer, it isn’t treated as a capital (finance) lease, and the asset isn’t capitalized in the same way, with the accompanying asset liability on the balance sheet under older standards. The lease payments are typically recorded as operating expenses as they’re incurred, reflecting the period cost of using the asset. The other statements describe aspects of a capital/finance lease or the consequences of different accounting treatments: transferring ownership at the end would indicate a capital lease; capitalizing the asset points to a finance lease; expensing lease payments as incurred is a standard outcome for operating leases but doesn’t itself define the lease type as clearly as the lack of ownership transfer.

Operating lease is defined by the absence of any expectation that ownership will transfer to the lessee. In this arrangement, the asset stays with the lessor, and the lessee simply uses it for a period of time in exchange for lease payments. Because ownership isn’t expected to transfer, it isn’t treated as a capital (finance) lease, and the asset isn’t capitalized in the same way, with the accompanying asset liability on the balance sheet under older standards. The lease payments are typically recorded as operating expenses as they’re incurred, reflecting the period cost of using the asset.

The other statements describe aspects of a capital/finance lease or the consequences of different accounting treatments: transferring ownership at the end would indicate a capital lease; capitalizing the asset points to a finance lease; expensing lease payments as incurred is a standard outcome for operating leases but doesn’t itself define the lease type as clearly as the lack of ownership transfer.