Financial Accounting and Reporting-CPA Practice Exam 2026 – Your All-in-One Guide to Exam Success!

An operating lease is characterized primarily by the arrangement in which the lessor retains ownership of the leased asset, while the lessee gains the right to use it for a specific period of time without assuming the benefits and risks of ownership. This is reflected in the correct choice, where the lessor collects rent without transferring ownership.

In an operating lease, the lessee typically pays periodic rental payments over the lease term, and at the end of the term, the asset is returned to the lessor. The asset does not appear on the lessee's balance sheet as an owned asset; instead, the lease payments are considered operating expenses. This structure is beneficial for lessees who may wish to avoid ownership risks and enjoy the flexibility of leasing.

Options for purchase at the end of the term and the transfer of ownership are features of finance leases rather than operating leases. A finance lease is structured to allow lessees to eventually own the asset, whereas operating leases do not convey that kind of ownership interest. The duration exceeding one year can apply to both operating and finance leases and does not distinctly characterize an operating lease.

Understanding these definitions and characteristics is essential for recognizing the financial implications and reporting requirements associated with different types of leasing arrangements in financial accounting.