How is unearned income accounted for on the Lessor Income Statement?

• A. Unearned income is amortized over the lease term so as to produce a constant periodic rate of return on the net investment.
• B. Unearned income is recognized only when cash is collected.
• C. Unearned income is amortized over the asset's useful life.
• D. Unearned income is recognized when the lease ends.

Answer: (A)

Unearned income on the Lessor Income Statement is recognized as a financing element of the lease. It is amortized over the lease term using an effective yield approach so that the period income reflects a constant rate of return on the net investment in the lease. This matches how a financing lease behaves: the lessor is earning interest on the investment, not just recording revenue when cash comes in or only at the end.

Why the other ideas don’t fit: revenue isn’t recognized only when cash is collected—accrual accounting requires earning income as time passes. It isn’t amortized over the asset’s useful life—that’s depreciation, not lease income. And it isn’t recognized only at the lease end—income is earned and recognized throughout the term.