Which journal entry records interest accrued on the lease liability in the lessee's books?

Which journal entry records interest accrued on the lease liability in the lessee's books?

• A. Dr Depreciation; Cr Right-of-Use Asset
• B. Dr Finance Costs; Cr Lease Liability
• C. Dr Lease Liability; Cr Cash
• D. Dr Cash; Cr Bank

Answer: (B)

Interest on the lease liability is treated as a finance cost in the lessee’s profit or loss, while also increasing the lease liability for the accrued amount. Under IFRS 16, the lease liability grows by the interest charge and the corresponding debit goes to finance costs in the P&L. So the appropriate journal entry when interest accrues is to debit Finance costs and credit Lease liability. This separates the expense recognition from any actual cash payment; depreciation relates to the right-of-use asset (not interest), and paying the lease liability would involve reducing the liability and cash, not recording the accrual of interest.

Interest on the lease liability is treated as a finance cost in the lessee’s profit or loss, while also increasing the lease liability for the accrued amount. Under IFRS 16, the lease liability grows by the interest charge and the corresponding debit goes to finance costs in the P&L. So the appropriate journal entry when interest accrues is to debit Finance costs and credit Lease liability. This separates the expense recognition from any actual cash payment; depreciation relates to the right-of-use asset (not interest), and paying the lease liability would involve reducing the liability and cash, not recording the accrual of interest.