PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 25, Problem 25PS
Valuing leases Suppose that the Greymare lease gives the company the option to purchase the bus at the end of the lease period for $1. How would this affect the tax treatment of the lease? Recalculate its value to Greymare and the manufacturer. Could the lease payments be adjusted to provide a positive
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Students have asked these similar questions
The lessee compares the present value of owningthe equipment with the present value of leasingit. Now put yourself in the lessor’s shoes. In a fewsentences, how should you analyze the decision towrite or not to write the lease?
Which 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.
A lessor with a sales-type lease involving an unguaranteed residual value at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?
The sales price less the present value of the residual value.
The lease payments plus the unguaranteed residual value.
The cost of the asset to the lessor, less the present value of any unguaranteed residual value.
The present value of the lease payments plus the present value of the unguaranteed residual value.
Chapter 25 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 25 - Types of lease The following terms are often used...Ch. 25 - Reasons for leasing Some of the following reasons...Ch. 25 - Lease treatment in bankruptcy What happens if a...Ch. 25 - Lease treatment in bankruptcy How does the...Ch. 25 - Lease characteristics True or false? a. Lease...Ch. 25 - Operating leases Explain why the following...Ch. 25 - Inflation and operating leases In Problem 7, we...Ch. 25 - Technological change and operating leases Look at...Ch. 25 - Valuing financial leases Look again at Problem 7....Ch. 25 - Valuing Financial Leases Look again at the...
Ch. 25 - Valuing financial leases Look again at the bus...Ch. 25 - Valuing financial leases In Section 25-5, we...Ch. 25 - Valuing financial leases In Section 25-5, we...Ch. 25 - Valuing financial leases A lease with a varying...Ch. 25 - Valuing financial leases Nodhead College needs a...Ch. 25 - Valuing financial leases The Safety Razor Company...Ch. 25 - Nonrecourse debt Lenders to leveraged leases hold...Ch. 25 - Leveraged leases How would the lessee in Figure...Ch. 25 - Prob. 23PSCh. 25 - Valuing leases Suppose that the Greymare lease...
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- Under a sales-type lease without an operating profit, how is the lessor's cost (i.e., the initial Lease Receivable account) computed: a. When there is no bargain purchase option or residual value? b. When there is a bargain purchase option? c. When there is no bargain purchase option but there is a guaranteed residual value? d. When there is no bargain purchase option but there is an unguaranteed residual value? e. Which discount rate does the lessor use in computing the lessor's cost (lease receivable)-the lessor's implicit rate or the lessee's incremental borrowing rate? Why? Any exceptions?arrow_forwardWhen is it appropriate for the lessee to use the lessor's implicit rate to calculate the present value of the lease payments? A.when the lessee's incremental borrowing rate is lower than the lessor's rate B.whenever the lessee knows what the lessor's rate is C.when the lessor's implicit rate is lower than the lessee's incremental borrowing rate D.when the lessor's rate is higher than the lessee's incremental borrowing ratearrow_forwardFor which of the following conditions will the lessor classify a lease as a sales-type lease? a.The leased asset may be exchanged for a similar asset during the lease term. b.The present value of the sum of the lease payments is equal to or more than the fair value of the underlying asset. c.The lease term is less than one year. d.The lease term is half of the underlying asset’s economic life.arrow_forward
- For which of the following conditions will the lessor classify a lease as a sales-type lease? A. The present value of the sum of the lease payments is equal to or more than the fair value of the underlying asset. B. The lease term is half of the underlying asset's economic life. C.The lease term is less than one year. D. The leased asset may be exchanged for a similar asset during the lease term.arrow_forwardWhich of the following is not included in the lease payments for the purpose of computing the lease liability? A. Fixed payments less any lease incentives receivable B. Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date C. Guaranteed residual value D. Contingent rent based on level of salesarrow_forwardWhat is selling profit on a sales-type lease? How do we account for a sales-type lease with a selling profit?arrow_forward
- Which 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_forwardUse the information for Escapee Company from BE21.20. Assume the same facts, except Escapee guarantees a residual value of $9,000 at the end of the lease term, which equals the expected residual value of the machinery. (a) Does this change your answer from BE21.20? (b) What if the expected residual value at the end of the lease term is $5,000 and Escapee guarantees a residual of $9,000?arrow_forwardWhen both the gross investment and cost of the leased asset is equal for both direct and sales-type finance lease with the sales-type finance lease resulting to a gross profit, which of the two would have a lower implicit interest rate on the lease? A)Cannot be determined B)Direct Finance Lease C)Equal for both D)Sales-Type Leasearrow_forward
- Answer True or False Both finance and operating leases are subject to capitalization. Under an operating lease, the lease bonus paid by the lessee to the lessor and amortized over the lease term as a reduction to lease income. When rental payments vary over the term of the operating lease, the lessor should recognize lease income on a straight-line basis, unless there is another method that is more appropriate The lessor uses the implicit interest rate in determining the present value of the lease payments Termination penalties are included in the lease payments if the lease term reflects the lessee exercising an option to terminate the lease. In a sale and leaseback transaction that qualifies as a sale under PFRS 16, the seller-lessee recognized only the amount of any gain or loss that relates to the rights transferred to the buyer-lessorarrow_forwardWhich type of lease will not increase a company’s assets or long-term liabilities? Select one: a. A one-year operating lease b. A lease for an asset of a specialized nature with no alternative use at the end of the lease term c. A finance lease d. A lease that transfers ownership of the asset to the lessee by the end of the lease termarrow_forwardAnswer True or False Initial direct costs are immediately recognized as an expense by the lessor when the cost incurred in conjunction with an operating lease. The lessor uses the implicit interest rate in determining the present value of the lease payments Termination penalties are included in the lease payments if the lease term reflects the lessee exercising an option to terminate the lease. In a sale and leaseback transaction that qualifies as a sale under PFRS 16, the seller-lessee recognized only the amount of any gain or loss that relates to the rights transferred to the buyer-lessorarrow_forward
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