A is corrent. For a direct financing lease, the difference between the gross investment in the lease and the sum of the present values of the components of the gross investment is, by definition, unearned interest income. Per ASC Topic 840, the unearned interest income is recognized as income over the lease term so as to produce a constant rate of return on the net investment using the effective interest method of amortization. Other methods of amortization are allowed by ASC Topic 840 provided the results are not materially different from those obtained by applying the prescribed method. Because no information is given concerning such materiality, this answer is the best answer.
B is incorrect. For a direct financing lease, the difference between the gross investment in the lease and the sum of the present values of the components of the gross investment is, by definition, unearned interest income. Per ASC Topic 840, the unearned interest income is recognized as income over the lease term so as to produce a constant rate of return on the net investment using the effective interest method of amortization. Other methods of amortization are allowed by ASC Topic 840 provided the results are not materially different from those obtained by applying the prescribed method.
B is incorrect. For a direct financing lease, the difference between the gross investment in the lease and the sum of the present values of the components of the gross investment is, by definition, unearned interest income. Per ASC Topic 840, the unearned interest income is recognized as income over the lease term so as to produce a constant rate of return on the net investment using the effective interest method of amortization. Other methods of amortization are allowed by ASC Topic 840 provided the results are not materially different from those obtained by applying the prescribed method.
D is incorrect. For a direct financing lease, the difference between the gross investment in the lease and the sum of the present values of the components of the gross investment is, by definition, unearned interest income. Per ASC Topic 840, the unearned interest income is recognized as income over the lease term so as to produce a constant rate of return on the net investment using the effective interest method of amortization. Other methods of amortization are allowed by ASC Topic 840 provided the results are not materially different from those obtained by applying the prescribed method.
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