Which type of lease reports higher assets in the lease’s early years? Which type of lease reports higher lease expenses in the lease’s early years.

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Which type of lease reports higher assets in the lease’s early years? Which type of lease reports higher lease expenses in the lease’s early years.

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Which type of lease reports higher assets in the lease’s early years? Which type of lease reports higher lease expenses in the lease’s early years.

Explanation & AnswerSolution by a verified expert

Explanation

The value of the assets in a finance lease is higher in the initial years but decreases in the subsequent years by deducting the annual amortization charges from the value of assets.
Value of expenses in a finance lease is higher in the initial years but decreases with every passing year because of decrease in interest expense with reduction of liability and decrease in amortization expense with reduction in the value of asset with every passing year. Interest and amortization expenses are calculated as a fixed percentage of liability and asset respectively.

Verified Answer

The financing leases report higher assets as well as higher lease expenses in the early years of the lease because the value of assets in early years is high which is amortised every passing year and its value gets reduced. The interest expense in the initial years is high due to high asset value and gets lower with the reduction in asset's value in the subsequent years.

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