Under ASC 842, which statement is true about leases classified as finance leases?

• A. They are not recognized on the balance sheet.
• B. They are treated the same as operating leases.
• C. They result in capitalization of both the asset and the liability, with depreciation and interest expense recognized.
• D. They only affect cash flow statements.

Answer: (C)

Under ASC 842, finance leases are recorded on the balance sheet because they embody a financing arrangement. You recognize a right-of-use asset and a lease liability. Over the lease term, the asset is depreciated and the lease liability accrues interest, with the interest portion and depreciation appearing in the income statement. This treatment mirrors how you would account for a financed purchase, showing both the asset being consumed over time and the financing cost of that asset. The statement is the best fit because it captures both the capitalization on the balance sheet and the distinct expense pattern (depreciation plus interest) that results from financing the lease. It isn’t correct to say there’s no balance-sheet impact, nor to claim the same income-statement treatment as operating leases (which, while they also have a right-of-use asset and lease liability, typically show a single lease expense rather than separate depreciation and interest). Leasing activities do affect cash flows as well, but the key point for finance leases is the capitalization and the depreciation–interest expense pattern.