Which two accounts are affected on the lessee’s books by a capital lease at inception?

Which two accounts are affected on the lessee’s books by a capital lease at inception?

• A. PP&E and Lease Payable
• B. Cash and Revenue
• C. Accounts Receivable and Revenue
• D. Inventory and Accounts Payable

Answer: (A)

Capital lease (finance lease) treatment means the lessee records both an asset and a liability up front. The asset represents the right to use the leased property and is put on the balance sheet as a fixed asset (PP&E). The corresponding liability is the lease obligation, recorded as a lease payable, equal to the present value of the minimum lease payments. This pairing—an asset on PP&E and a lease payable liability—captures the economics of financing the use of the asset over the lease term. Other options don’t fit because they reflect revenue, receivables, or normal payables related to goods or services, not the capitalization of a lease. The leased asset will be depreciated over the shorter of the lease term or the asset’s useful life, while the lease liability is gradually reduced as payments are made.

Capital lease (finance lease) treatment means the lessee records both an asset and a liability up front. The asset represents the right to use the leased property and is put on the balance sheet as a fixed asset (PP&E). The corresponding liability is the lease obligation, recorded as a lease payable, equal to the present value of the minimum lease payments. This pairing—an asset on PP&E and a lease payable liability—captures the economics of financing the use of the asset over the lease term.

Other options don’t fit because they reflect revenue, receivables, or normal payables related to goods or services, not the capitalization of a lease. The leased asset will be depreciated over the shorter of the lease term or the asset’s useful life, while the lease liability is gradually reduced as payments are made.