Question

In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income

a. should be amortized over the period of the lease using the effective interest method.
b. should be amortized over the period of the lease using the straight-line method.
c. does not arise.
d. should be recognized at the lease's expiration.

Answer 1

In a direct-financing lease, unearned income should be amortized over the period of the lease using the effective interest method.

Step-by-step explanation:

In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income should be amortized over the period of the lease using the effective interest method. The effective interest method calculates the interest revenue based on the carrying amount of the lease receivable and the implicit interest rate in the lease. This method provides a more accurate representation of the interest revenue over the lease term.