Lease accounting under ASC 842 for lessees: which is true?

• A. Lessees recognize only a rent expense; no asset or liability.
• B. Lessees recognize a right-of-use asset and a lease liability; finance leases capitalize both, recognizing depreciation and interest; operating leases record a lease expense and a ROU asset and a liability.
• C. Lessees immediately expense the lease in full.
• D. Lessees classify all leases as operating.

Answer: (B)

Under ASC 842, lessees bring a right-of-use asset and a lease liability onto the balance sheet for virtually all lease arrangements. The way the expense appears on the income statement depends on how the lease is classified.

If the lease is a finance lease, the lessee treats it like a financed purchase: the right-of-use asset is depreciated, and the lease liability accrues and is paid as interest expense. This means two separate, ongoing costs—depreciation of the asset and interest on the liability—which together reflect the economics of using the asset over time.

If the lease is an operating lease, the lessee generally records a single lease expense over the term (often straight-line) while still showing the right-of-use asset and the lease liability on the balance sheet. The expense reflects the lease payments, but the asset and liability remain acknowledged to represent the future obligations and the right to use the asset.

The other options fail because they ignore the required balance sheet recognition or misstate how expenses are recognized under ASC 842.