Financial Accounting and Reporting-CPA Practice Exam

Question: 1 / 400

How is rental income recognized by the lessor for operating leases?

When cash is received from the lessee

As earned over time

When it comes to recognizing rental income for operating leases, the lessor employs an accrual basis of accounting. This means that rental income is recognized as earned over the lease term, which aligns with the period when the lessee is entitled to use the leased property. According to Generally Accepted Accounting Principles (GAAP), the lessor records rental income on a straight-line basis over the lease term, regardless of the actual cash flow that may occur.

This approach ensures that the financial statements accurately reflect the revenue earned in each accounting period, matching income with the services provided. The timing of cash receipts does not impact when the income is recognized, which is why other choices like the timing of cash collection, lease agreement signing, or the end of the lease term do not align with the principles guiding rental income recognition under operating leases.

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At the end of the lease term

When the lease agreement is signed

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