Financial Accounting and Reporting-CPA Practice Exam

In an operating lease, when the selling price exceeds fair value, how is the gain treated?

1. Recognized immediately

2. Deferred and amortized over the asset's life

3. Deferred and not amortized

4. Fully recognized in the next period

The correct answer is: Deferred and amortized over the asset's life

In the context of an operating lease, when the selling price of an asset exceeds its fair value, the gain is treated by deferring and amortizing it over the asset's life. This treatment aligns with the accounting principle that profit should be realized in a systematic manner over the time that the benefits of the asset are received. The rationale behind this approach is to match the revenue from the sale with the expenses related to the asset over its useful life, adhering to the matching principle in accounting. By deferring the gain, the financial statements more accurately reflect the economic reality that the excess selling price represents future economic benefits to the lessor, which should be recognized gradually as the lease is fulfilled. This contrasts with the other options, which reflect different accounting treatments. Immediate recognition may overstate the financial performance in the current period, not adhering to the principle of matching. Deferring the gain but not amortizing it would also misrepresent the financial condition over time, as it would leave the gain unrecognized in future periods. Fully recognizing the gain in the next period does not align with the long-term benefit recognition that corresponds with the duration of the lease. Thus, deferring and amortizing the gain over the asset's life provides a more accurate depiction