Dirkin and Trente Inc

Multiple Choice

Dirkin and Trente Inc. (DTI) has decided to lease its electronic switching system for four years. The useful lifetime of the asset is seven years, the present value of the lease payments account for less than 60% of the fair value of the switching system and the outsourcing company which is leasing the equipment to DTI will hold title to the assets and reclaim the equipment at termination of the contract. What are the accounting implications of the leasing charges?

A) Ignored as a capital lease is treated as asset ownership. Both the asset and the long-term liability side of the balance sheet increase and capital cost allowance is taken.
B) Treated as an operating expense and appearing on the income statement. There is no impact on the balance sheet and no capital cost allowance is taken.
C) An operating expense is recorded on the income statement and the book value of the asset increases both the asset and the long-term liability sides of the balance sheet. No capital cost allowance is taken.
D) Decomposed into interest and principle with the interest portion appearing on the income statement as interest expense and the principle portion increasing total assets and long-term liabilities on the balance sheet. Capital cost allowance is taken.
E) Decomposed into interest and principle with the interest portion appearing on the income statement as interest expense and the present value of the principle portion increasing total assets and long-term liabilities on the balance sheet. No capital cost allowance is taken.