Financial Management: Theory & Practice (MindTap Course List)
15th Edition
ISBN: 9781305632295
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning
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Chapter 19, Problem 5Q
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To discuss: Merits and demerits of capitalizing leases and related assets.
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One alleged advantage of leasing voiced in the past was that it kept liabilities off the balancesheet, thus making it possible for a firm to obtain more leverage than it otherwisecould have. This raised the question of whether the lease obligation and the asset involvedshould be capitalized and shown on the balance sheet. Discuss the pros and cons of capitalizingleases and related assets.
One advantage of leasing voiced in the past is that it kept liabilities off the balance sheet, thus making it possible for a firm to obtain more leverage than itotherwise could have. This raised the question of whether or not both the leaseobligation and the asset involved should be capitalized and shown on the balance sheet. Discuss the pros and cons of capitalizing leases and related assets
What would be the advantages and disadvantages of leasing assets instead of owning them? How would the financial statements be different in a leasing situation (for both operating leases and finance leases) for the lessee? What about the lessor (including all of the types)? What disclosures should be made by lessees and lessors related to future lease payments?
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Financial Management: Theory & Practice (MindTap Course List)
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Identify the CORRECT statement regarding the effect of lease on return on capital employed. Select one: O a. A company is able to improve its return on capital employed (ROCE) by entering into a finance lease for leasing non-current assets rather than borrowing to cover the purchase price of the assets. O b. A company is able to improve its return on capital employed (ROCE) by leasing non-current assets rather than borrowing to cover the purchase price of the assets. O c. A company is unable to improve its return on capital employed (ROCE) by leasing non-current assets rather than borrowing to cover the purchase price of the assets.arrow_forwardWhich of the statements is most correct? Select one: a. Some years ago leasing was called "off balance sheet financing" because the leased asset and the corresponding lease obligation did not appear directly on the balance sheet. Today, though, the situation has changed materially because all types of lease must be capitalized and reported on the balance sheet, along with the value of the leased asset. O b. In a lease-versus-purchase analysis, cash flows should generally be discounted at the WACC. O . Each of the statements is true. O d. Each of the statements is false.arrow_forwardHow may the use of leases shift the risk of rising expenses from the lessor to the lessee?arrow_forward
- Which is not an advantage of leasing from a lessee's viewpoint? A.The asset can be acquired without having to make a substantial down payment. B. Leased assets are never reported on the balance sheet. C. The risk of obsolescence may be reduced. D. A lease may provide 100% financing.arrow_forwardWhich of the following is nota reason why some companies lease rather than buy? A. Leasing may allow you to borrow with little or no down payment. B. Leasing can improve the balance sheet by reducing long-term debt. C. Leasing can lower income taxes. D. Leasing transfers the title to the lessee at the beginning of the lease.arrow_forwardIdentify the incorrect statement concerning lease finance. A. Companies that are short of finance can use leasing as a source of assets B. Lease payments attract tax relief C. Interest payments attract tax relief D. Finance leasing allows companies to avoid the problem of obsolescence in cases where assets are subject to rapid technological change E. Empirical research has shown that many companies use an incorrect method when evaluating lease financearrow_forward
- Which of the following typically represents an advantage of leasing over purchasing an asset with an installment note? a. Lease payments often are lower than installment payments.b. Leasing generally requires less cash upfront.c. Leasing typically offers greater flexibility and lower costs in disposing of an asset.d. All of the above are advantages of leasing.arrow_forwardDifferentiate between an operating lease, acapital (or financial) lease, and a sale andleaseback arrangement. How would the pastaccounting treatment of leases mislead investorsand what rules have been put in place to mitigatethis problem?arrow_forwardWhich of the following statements is true about initial direct costs? A. Initial direct costs of a sales-type lease should be expensed at the commencement of the lease only if no selling profit or loss has been incurred. B. Initial direct costs are ownership-type costs such as insurance, maintenance, and taxes. C. Initial direct costs of an operating lease should be recorded by the lessor as a prepaid asset. D. Initial direct costs should always be debited against income by the lessor in the period of the inception of the lease.arrow_forward
- Assuming that FASB Statement 13 and ASU2016-02 are working as they are supposed to work,should traditional leasing arrangements enable afirm to use more financial leverage than it otherwise could? How did synthetic leases alter the situation? How do FASB Statement 13, ASU 2016-02and synthetic leases affect the rate at which cashflows are discounted in a lease analysis?arrow_forwardWhich one of the following accurately describes an aspect /aspects of a leveraged lease? I. The lenders own the leased asset. I. The lessee pays all lease payments to the lenders. II. The lessor has a first lien on the leased asset. IV. The lessor receives the tax benefits associated with ownership of the leased asset. V. The lessee does not have to pay the remaining lease payments if the lessor defaults on the nonrecourse loan. Select one: O a. IIl and IV only O b. IV and V only O c. I, Il and IV only O d. IV only O e. I and IIl onlyarrow_forwardA key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment. True or false explainarrow_forward
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