Question

Jackson Co. (lessee) entered into a 10-year operating lease on January 1, Year 1. Annual lease payments are $30,000, and payments begin December 31, Year 1. The lessee knows that the rate implicit in the lease is 8%, and its incremental borrowing rate is 7%. The useful life of the asset is 20 years. How should Jackson Co. account for the lease in the income statement

Answer 1

Answer: B. lease payments are allocated over the full lease term on a straight line basis and reported as lease expense in the income statement

Explanation:

The options given include:

A. Interest expense for the lease liability and amortization expense for the right to use asset must be reported separately in the income statement.

B. lease payments are allocated over the full lease term on a straight line basis and reported as lease expense in the income statement

C. the incremental borrowing rate is used to calculate the annual interest expense on lease liability

D. interest expense for the lease liability is recognized in full on the commencement dates of lease.

Jackson Co. should account for the lease in the income statement as "lease payments are allocated over the full lease term on a straight line basis and reported as lease expense in the income statement".

Based on the information given, the correct option is B.