CFA Practice Question

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CFA Practice Question

When payments are made as part of a capital lease agreement, how does the lessee determine the amount to debit to the account "Obligation under Capital Leases"? It is equal to the ______.

A. lease payment
B. difference between the lease payment and the principal amount
C. amortization of the leased asset
D. difference between the lease payment and the interest expense
Correct Answer: D

The debit to the "Obligation under Capital Leases" account is the principal payment on the lease. It is the difference between the total lease payment (excluding executory costs) and the interest expense, which is the lease obligation balance times the discount rate.

User Contributed Comments 5

User Comment
stranger a. lease payment includes the principal and the interest expense b. difference of lease payment and principal will be the interest expense c. x d. THE DIFFERENCE BETWEEN LEASE PAYMENT AND INTEREST EXPENSE GIVES THE DEBT AMOUNT OR LIABILITY
o123 aweome question...single handedly clarified the entire lease payment structure!
quanttrader in capital lease, take on the asset at total amt x. Obligation under capital lease = x - interest expense (it it is principal only)-- like amortization for home.
quanttrader ie principal outstanding
gill15 If this question said the difference between total lease payments and total interest expense I would have chose D...

but it didnt say total...doesnt make sense without that. Then it's just an individial payment we're accounting for.
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