Question

Identify the two recognized lease accounting methods for lessees and distinguish between them.

Short answer

The two methods are the operating method and the capital-lease method.

Step-by-step solution

Meaning of Lessee

A person who takes land, equipment, building, or any property on lease is called a lessee. A lessee is not the owner of the property but instead, has the right to use it. Lease payments are usually made monthly.

Identifying and explaining the two recognized lease accounting methods for lessees

The operating method and the capital-lease technique are the two lease accounting methods accessible to lessees. The leased asset remains a lessor's property under the operating method, with the payment of a lease rental reported as a rental expenditure. In most cases, a lessor is responsible for the leased asset's insurance, taxes, and upkeep.

A lessee uses the capital-lease technique to handle the leasing transaction as if it were a credit purchase; as a result, the lessee creates an asset and an associated obligation, and accounts for asset depreciation, liability reduction, and interest expenditure.

1. Creates an asset and an associated obligation; and
2. Accounts for asset depreciation, liability reduction, and interest expenditure.