In the government-wide statements, the initial recognition of a lease for a capital asset involves which of the following?

• A. Debit to a Lease Asset and Credit to Lease Obligations Payable.
• B. Debit to Expenditure and Credit to Cash.
• C. Debit to a Lease Asset and Debit to Lease Liability.
• D. Credit to Lease Asset and Credit to Cash.

Answer: (A)

The main idea is that a capital lease on government-wide statements requires recognizing both a lease asset and a lease liability. At inception, you increase the asset you have the right to use (debit the Lease Asset) and you record the obligation to make future lease payments (credit the Lease Obligations Payable, i.e., the lease liability). This mirrors the accrual basis of accounting: you’ve acquired a capital asset and you’ve incurred a long-term liability for the future payments.

Why this is the best choice: it correctly pairs an asset increase with a corresponding liability increase. You’re not expensing or paying cash yet at the initial recognition; you’re recognizing the asset and the financing obligation. The other options misstate the nature of the entry—expensing or cash-out uses, or debiting the liability instead of crediting it, or crediting the asset—so they don’t reflect the proper capitalization of a capital lease.