Question

A company leases trucks and properly classifies the leases as finance leases. The leases have a 10-year term, and the lease calculations were done three years ago when interest rates were lower. Which of the following is the appropriate accounting treatment, if any, for the application of the fair value option to lease transactions?A. Recognize the change to fair value accounting with an unrealized loss in the income statement.B. Leases are not eligible for the fair value option.C. Recognize the change to fair value accounting with an unrealized loss in accumulated other comprehensive income.D. Recognize the change to fair value accounting with a cumulative adjustment to beginning retained earnings.

Answer 1

Answer:

D. Recognize the change to fair value accounting with a cumulative adjustment to beginning retained earnings.

Explanation:

In the situation whereby the 10 year term of the leased trucks value has adjusted leading to the increase in the interest rate of the lease, the best option would be recognize the change to fair value with its cummulative adjustment to beginning of the retained earnings.