What does it mean to capitalize a lease? What is a lease liability?

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What does it mean to capitalize a lease? What is a lease liability?

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What does it mean to capitalize a lease? What is a lease liability?

Explanation & AnswerSolution by a verified expert

Explanation

Capitalising a lease records a lease whose term exceeds one year in the books of lessor and lessee. The lease is recorded as an asset in the books of the lessor and as a liability in the books of the lessee. Recording of these financial terms will give the actual financial statements representing actual assets and liabilities of the company to the end users. Therefore, the depreciation expense for the concerned assets and interest expense for the concerned liabilities are adjusted in the financial statements.
A lease liability is the sum of present values of all the payments a company has to make to the lessor on the account of a lease agreement. These lease payments are discounted using the lessee's incremental borrowing rate.

Verified Answer

Capitalising a lease means to record any lease whose term is more than one year as the asset in the books of the lessor and as a liability in the books of the lessee.
A lease liability is the present value of all the financial obligations arising out of a lease agreement. It is calculated as the present value of all the lease payments up to the lease term discounted at the cost of borrowing of the lessee.

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