Under U.S. GAAP, which financial statement does a capital lease affect?

A. Income statement only
B. Balance sheet only
C. Income statement and balance sheet

Correct Answer: C

A capital lease affects the income statement because a part of each lease payment is interest expense. The leased asset is amortized, resulting in amortization expense on the income statement. A capital lease also affects the balance sheet. At the inception of the lease, the lessee recognizes an asset and a liability equal to the present value of the lease payments to be made under the terms of the lease.