How should the lessee record a capital lease on its balance sheet?

• A. as an asset and an obligation
• B. as an asset only
• C. as a liability only
• D. as revenue

Answer: (A)

A capital lease puts a right-to-use asset and a lease liability on the lessee’s balance sheet. At the start, you recognize the asset and the obligation at the present value of the minimum lease payments. This reflects that you’ve gained control of using the asset and also incur a future payment obligation. Over the life of the lease, you depreciate the asset and recognize interest on the lease liability while making lease payments that reduce the liability. It’s not recorded as revenue, and it isn’t just an asset or just a liability—the financing nature of a capital lease requires both.