What is the required journal entry for the inception of a capital lease with minimum lease payments present value of $96?

In the context of accounting for capital leases, a capital lease is treated similarly to a purchase of an asset, as it effectively transfers risks and rewards of ownership to the lessee. Therefore, when a capital lease is initiated, the lessee recognizes an asset and a corresponding liability on their balance sheet.

The correct entry reflects the proper accounting treatment for the inception of a capital lease. When the minimum lease payments' present value is identified as $96, this amount should be recorded as both an asset and a liability. The asset is recognized as a capital asset, representing the right to use the leased property, while the lease obligation demonstrates the commitment to make future lease payments. This results in a capital asset increase along with a financing source indicating the obligation to make payments.

While recognizing expenditures and revenues might seem logical, this scenario specifically deals with asset acquisition through leasing rather than an operational expenditure. The entry that reflects the accounting standards and correct treatment of capital leases is the addition of a capital asset and the establishment of a liabilities account, representing the lease obligation. Hence, recognizing the capital asset with an offsetting entry for the corresponding lease payable aligns with authoritative accounting guidelines.