Leases

Under ASC 842, a finance lease is accounted for like a purchase: the lessee records a right‑of‑use asset and a lease liability at commencement, then recognizes interest expense on the liability and amortisation of the asset. Thus B is correct. Option A is a common misconception that leases are treated only as rent expense, which applies only to operating leases, not finance leases.

Under ASC 842, lessees can make an accounting policy election for leases with a term of 12 months or less to recognize lease payments in profit or loss on a straight-line basis. This allows them to avoid capitalizing these short-term agreements as right-of-use assets and lease liabilities, though they cannot simply ignore the transactions.

ASC 842 requires lessees to record a right-of-use asset and a corresponding lease liability for operating leases, reflecting the present value of lease payments. A diagram for this topic isn't available yet — the worked example below walks the same reasoning step by step.

• !Option A is a common misconception that leases are treated only as rent expense, which applies only to operating leases, not finance leases.
• !This allows them to avoid capitalizing these short-term agreements as right-of-use assets and lease liabilities, though they cannot simply ignore the transactions.

Answer each from memory — you'll see instantly whether you're right and why.

Run a focused 10-question mini-mock on Leases and see it stick.