During each lease term, minimum payments are allocated between which components?

During each lease term, minimum payments are allocated between which components?

• A. Reduction of the obligation and interest expense
• B. Depreciation and amortization
• C. Revenue and expense
• D. Cash and accrual adjustments

Answer: (A)

Minimum lease payments create a lease liability that behaves like a loan. Each period, part of the payment reduces the outstanding balance (principal), and part covers the financing cost (interest expense) for that period. The depreciation of the right‑of‑use asset is recorded separately and does not come from the minimum payments. So the correct allocation is the reduction of the obligation and interest expense.

Minimum lease payments create a lease liability that behaves like a loan. Each period, part of the payment reduces the outstanding balance (principal), and part covers the financing cost (interest expense) for that period. The depreciation of the right‑of‑use asset is recorded separately and does not come from the minimum payments. So the correct allocation is the reduction of the obligation and interest expense.