Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 19, Problem 8MC
Lewis’s management has been considering moving to a new downtown location, and they are concerned that these plans may come to fruition prior to the equipment lease’s expiration. If the move occurs then Lewis would buy or lease an entirely new set of equipment, so management would like to include a cancelation clause in the lease contract. What effect would such a clause have on the riskiness of the lease from Lewis’s standpoint? From the lessor’s standpoint? If you were the lessor, would you insist on changing any of the other lease terms if a cancelation clause were added? Should the cancelation clause contain provisions similar to call premiums or any restrictive covenants and/or penalties of the type contained in bond indentures? Explain your answer.
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There are two parties in any lease contract—the lessee and the lessor. To a lessor, a lease analysis involves a capital budgeting analysis of the property or equipment to be leased. The lessor’s decision is either to purchase and lease-out the asset, or not make the investment at all.
Like any capital budgeting decision, the lessor needs to evaluate the rate of return expected to be earned from making the lease. Further, since the cost and other terms of leases involving high-cost items are negotiated, this rate of return information is also important information for a prospective lessee.
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Chapter 19 Solutions
Financial Management: Theory & Practice
Ch. 19 - Define each of the following terms: a. Lessee;...Ch. 19 - Distinguish between operating leases and financial...Ch. 19 - Prob. 3QCh. 19 - Prob. 4QCh. 19 -
Ch. 19 -
Ch. 19 -
Ch. 19 - Harmeling Paint Ball (HPB) Corporation needs a new...Ch. 19 - Reynolds Construction (RC) needs a piece of...Ch. 19 - Big Sky Mining Company must install 1.5 million of...
Ch. 19 - Prob. 7PCh. 19 -
Start with the partial model in the file Ch19 P08...Ch. 19 - Prob. 1MCCh. 19 - Prob. 2MCCh. 19 - Prob. 3MCCh. 19 - Lewis Securities Inc. has decided to acquire a new...Ch. 19 - Now assume that the equipments residual value...Ch. 19 - The lessee compares the present value of owning...Ch. 19 - (1) Assume that the lease payments were actually...Ch. 19 - Lewis’s management has been considering moving to...Ch. 19 - Prob. 9MC
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- The lessor would most likely prefer a ________ or ________ lease to an operating lease. Nonoperating lease treatment would permit a financial service company lessor to remove heavy machinery and equipment, jet airlines, oceangoing vessels, and such from its balance sheet and replace it with the ________, a financial asset compatible with the nature of its business. In addition, the nonoperating lease results in the recognition of ________, rather than ________ revenue. Group of answer choices standalone; operating; fair value of the leased asset; interest income; rent direct financing; operating; net investment in the lease; financing income; unearned standalone price; sales-type; fair value of the leased asset; financing income; unearned direct financing; sales-type; net investment in the lease; interest income; rentarrow_forwardA lease is an agreement in which the lessor conveys the right to use an asset for an agreed period of time to the lessee in return for a payment or series of payments (IAS 17.4). Because of rapid changes in technologies, most of the production companies involve in the lease contracts rather than of purchasing new machineries. Being the accounting specialization student, how will you support this? Explain any three advantages of this contract with suitable examples.arrow_forwardWhat 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?arrow_forward
- A salesperson is selling a leased commercial property. what will happen to the lease after the sale is consummated ? A. the lease is assigned to the new owner ? b. the mease expires and the tenanr must move.? c . the tenant and the new owner must negatiate a new lease ? d. the new owner has the option of canceling the lease or accepting the lease .arrow_forwardIn our Anderson Company example, we assumed that the lease could notbe canceled. What effect would a cancellation clause have on the lessee’sanalysis? On the lessor’s analysis?arrow_forwardAble Equipment entered into an arrangement to provide M. T. Bin Wholesale’s data center with Able’s newest server model. Due to security processes in place for its customer data, M. T. Bin requires access to the equipment and the ability to direct its use. Able can replace or reconfigure the equipment if Able finds it’s financially advantageous to do so. Does the contract contain a lease?arrow_forward
- In the lease versus buy decision, leasing is often preferable Oa. because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset. Ob. because, generally, no down payment is required, and there are no indirect interest costs. Oc. because it has no effect on the firm's ability to borrow to make other investments. Od. because the lessee owns the property at the end of the least term. Oe. because lease obligations do not affect the firm's risk as seen by investors.arrow_forwardWhen preparing the journal entries for an operating lewhich of the following is NOT TRUE? If all of these answers are rue, select "All of the answers above are true". The lessee will reduce the Lease Liability account as lease payments are made. The lessor will recognize depreciation on equipment leased to others. The lessor will reclassify equipment leased to the lessee in an Equipment Leased to others account. The lessee will debit the Right-to-Use Asset account for the present value of the future lease payments. All of the answers above are true.arrow_forwardDoes the updated lease standard change an organizations decisions about whether to lease or buy equipment or real estate? Does leasing an asset under the new rules have any new additional benefits?arrow_forward
- look at the following situation: client D sold a June Oil future contract and plans to deliver. 1- what is the role played by the clearinghouse in the above situation? 2- is the existence of a clearinghouse important?arrow_forwardWalker Company is a manufacturer and lessor of computer equipment. What should be the nature of its lease arrangements with lessees if the company wishes to account for its lease transactions as sales-type leases?arrow_forwardPart ILynbrook, Inc. is considering leasing a CAT Scan machine for its operations. As the Controller of Lynbrook, you have been asked to provide management with the lease information related to the CAT Scan. Lynbrook is considering leasing the machine from Capital Leasing, who in turn purchased the machine from the manufacturer, ScanHouse Corp. for $1,000,000. Required:Round your answers to the nearest whole dollar amounts.1. How should this lease be classified by Lynbrook and by Capital Leasing?2. Prepare appropriate entries for both Lynbrook and Capital Leasing from the beginning of the lease through the second rental payment on April 1, 2020. Depreciation and amortization are recorded at the end of each fiscal year (December 31).3. Assume Lynbrook leased the machine directly from the manufacturer, ScanHouse Corp., which produced the machine at a cost of $800,000. Prepare appropriate entries for ScanHouse from the beginning of the lease through the second rental payment on April 1,…arrow_forward
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