From the lessee’s perspective, a capital lease results in recognizing which on the balance sheet?

• A. Only a right-of-use asset
• B. An asset and a liability
• C. Only lease expense
• D. No balance sheet impact

Answer: (B)

When a lease is classified as capital (finance) from the lessee’s perspective, the lessee records both an asset and a liability on the balance sheet. The asset represents the right to use the leased asset over the term (often called a right-of-use asset), while the liability reflects the obligation to make lease payments, measured at the present value of those payments. Over time, the asset is depreciated and the liability accrues interest with payments reducing it. Recognizing only the asset or only a lease expense would fail to reflect the lessee’s financial obligations and ownership-like control of the asset.