Which statement about lease recognition under ASC 842 for a finance lease is true?

• A. Right-of-use asset and lease liability recognized; depreciation on ROU asset and interest on lease liability.
• B. No assets recorded; only rent expense.
• C. Lease is treated as operating; only rent expense recorded.
• D. Lease liability is recognized but no asset.

Answer: (A)

Under ASC 842, a finance lease is treated like a financed purchase. At the start, you recognize both a right-of-use asset and a lease liability for the present value of the lease payments. Over the term, you record depreciation on the right-of-use asset and interest on the lease liability. This separation—depreciation expense on the asset and interest expense on the liability—captures the financing nature of the lease, which is why the statement describing both the asset and liability plus depreciation and interest is correct. The other options don’t reflect this pattern: you don’t ignore the asset, and finance leases aren’t expensed only as rent; that would be more characteristic of an operating lease, which has a different expense treatment.