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What distinguishes a capital lease from an operating lease?

A. The lessee has to return the asset in an operating lease.
B. The lessee owns the asset in a capital lease.
C. Payments differ in a capital lease versus an operating lease.
D. The lessee has use of the asset in a capital lease but not in an operating lease.



Answer :

GinnyAnswer

Final answer:

A capital lease involves ownership of the asset, structured payments for the asset and interest, and the lessee having use rights as if they were the owner, while an operating lease lacks ownership, has rental-based payments, and restricts the lessee's use of the asset.


Explanation:

Capital lease vs. Operating lease:

  • The primary distinction between a capital lease and an operating lease lies in ownership. In a capital lease, the lessee essentially owns the asset and treats it as a capital expenditure on their balance sheet, whereas in an operating lease, the lessee does not own the asset.
  • A capital lease typically involves payments that are structured to cover both the cost of the asset and the interest, while an operating lease payments mainly cover the rental cost of the asset.
  • In a capital lease, the lessee has the right to use the asset as if they were the owner, while in an operating lease, the lessee does not have ownership rights and the asset's use is limited.

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