Which lease type is typically a long-term arrangement with an option to purchase at the end, and is treated as a purchase for accounting?

Which lease type is typically a long-term arrangement with an option to purchase at the end, and is treated as a purchase for accounting?

• A. Operating Lease
• B. Dry Lease
• C. Capital Lease
• D. ACMI Lease

Answer: (C)

This item tests how leases are classified for accounting based on who effectively takes ownership-like risks and rewards. A capital (finance) lease is the arrangement that fits a long-term commitment with an end-of-term option to purchase and is treated as a purchase on the lessee’s books. Because the lessee is expected to gain ownership-like control and bear substantially all the risks and rewards of the asset, the lease is recorded as an asset and a corresponding liability for the lease payments. The asset is depreciated, and interest expense is recognized over the term, just like a financed purchase. In contrast, an operating lease keeps the asset on the lessor’s balance sheet and is treated as a rental expense, with no purchase-like treatment on the lessee’s books. Dry leases and ACMI leases are specialized aircraft arrangements that typically do not involve a bargain purchase option at the end and are not accounted for as purchases.

This item tests how leases are classified for accounting based on who effectively takes ownership-like risks and rewards. A capital (finance) lease is the arrangement that fits a long-term commitment with an end-of-term option to purchase and is treated as a purchase on the lessee’s books. Because the lessee is expected to gain ownership-like control and bear substantially all the risks and rewards of the asset, the lease is recorded as an asset and a corresponding liability for the lease payments. The asset is depreciated, and interest expense is recognized over the term, just like a financed purchase.

In contrast, an operating lease keeps the asset on the lessor’s balance sheet and is treated as a rental expense, with no purchase-like treatment on the lessee’s books. Dry leases and ACMI leases are specialized aircraft arrangements that typically do not involve a bargain purchase option at the end and are not accounted for as purchases.