How should a Lessor account for an Operating Lease on its balance sheet?

• A. Lease property is capitalized as cost under 'investment in leased property', and depreciated straight-line over the lease term to the residual value.
• B. Lease property is recorded as a current asset.
• C. Lease property is not recognized on the balance sheet.
• D. Lease property is recorded as inventory.

Answer: (A)

In an operating lease, the lessor still owns the property, so the asset stays on the balance sheet. It’s recorded as an investment in leased property and depreciated straight-line over the lease term to the residual value. This reflects that the lessor continues to own and use the asset to earn lease income throughout the term, while gradually recognizing the asset’s consumption.

Stating the asset as a current asset would misclassify its long-term nature, not recognizing it would understate assets, and labeling it as inventory would imply it’s held for sale in the ordinary course—neither applies to leased property under an operating lease.