Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 25, Problem 3PS
Operating leases Explain why the following statements are true:
- a. In a competitive leasing market, the annual operating lease payment equals the lessor’s equivalent annual cost.
- b. Operating leases are attractive to equipment users if the lease payment is less than the user’s equivalent annual cost.
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Students have asked these similar questions
1. Which statement is incorrect about initial direct costs?
a. Initial direct costs incurred by the lessee in finance lase are added to the amount recognized as an asset and to the finance lease liability.
b. In a direct financing lease, initial direct costs are added to the net investment in the lease.
c. In a sales type lease, initial direct costs are expensed as component of cost of goods sold.
d. For operating leases, initial direct costs are deferred and allocated over the lease term.
2. If the lessor and lessee use different interest rates to account for a finance lease, then
a. The lessor will use different account titles to record the leasing transactions
b. Total expenses and revenues will be equal
c. Total expenses and revenues will be different
d. The lessee and the lessor cannot use different interest rates
3. In the case of a lease of land and building where title to the land is not transferred, the lease is generally treated as if:
a. Both land and building are finance…
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?
Compared to using a fi nance lease, a lessee that makes use of an operating lease will mostlikely report higher:A . debt.B . rent expense.C . cash fl ow from operating activity.
Chapter 25 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 25 - Types of lease The following terms are often used...Ch. 25 - Reasons for leasing Some of the following reasons...Ch. 25 - Operating leases Explain why the following...Ch. 25 - Lease characteristics True or false? a. Lease...Ch. 25 - Lease treatment in bankruptcy What happens if a...Ch. 25 - Nonrecourse debt Lenders to leveraged leases hold...Ch. 25 - Operating leases Acme has branched out to rentals...Ch. 25 - Prob. 9PSCh. 25 - Prob. 10PSCh. 25 - Technological change and operating leases Look at...
Ch. 25 - Prob. 12PSCh. 25 - Taxes and leasing Look again at the bus lease...Ch. 25 - Taxes and leasing In Section 25-4 we showed that...Ch. 25 - Valuing financial leases A lease with a varying...Ch. 25 - Prob. 18PSCh. 25 - Valuing leases The Safety Razor Company has a...Ch. 25 - Lease treatment in bankruptcy How does the...Ch. 25 - Leveraged leases How would the lessee in Figure...Ch. 25 - Prob. 22PSCh. 25 - Valuing leases Suppose that the Greymare lease...
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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
- Which 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_forwarda leasing contract, many costs to the tenant are not included in the base rent. These extra costs will amount to a large part of the total payment. What kind of lease would this be? a) Percentage lease b) Net lease c) Gross lease d) Variable leasearrow_forwardhelp me to solve it pleasearrow_forward
- A 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_forwardThe following statements relate to the impact on the financial statements for operating vs. finance leases. Indicate all statements that are correct. Select one or more: a. The right of use asset is shown at a higher amount for a finance lease. b. The lease liability is measured as the present value of future cash flows for both operating and finance leases. c. Net Income is higher at first when a lease is classified as a finance lease. d. Operating Income is lower when a lease is classified as an operating lease.arrow_forwardThe following statements relate to the impact on the financial statements for operating vs. finance leases. Indicate all statements that are correct. Select one or more: a. Net Income is higher at first when a lease is classified as a finance lease. b. The right of use asset is shown at a higher amount for a finance lease. c. Operating Income is lower when a lease is classified as an operating lease. d. The lease liability is measured as the present value of future cash flows for both operating and finance leases. PreviousSave AnswersNextarrow_forward
- 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 following statements is characteristic of leases? a.If a lease is classified as an operating lease, the lessee records an asset on its statement of financial position. b.Lease agreements are not a popular form of financing the purchase of assets because leases require a large initial outlay of cash. c.If a lessor classifies a lease as a finance lease, the lessor records a lease liability on its statement of earnings. d.Accounting recognizes two types of leases—operating and finance.arrow_forwardThere 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. From the following statements, identify the steps involved in lease analysis from a lessor’s perspective. Check all that apply. Determine the lease payments minus income taxes and any maintenance expenses that the lessor must incur as per the lease agreement. Determine the invoice price of the leased equipment minus any lease payments made in advance. Determine the periodic…arrow_forward
- When a lessor receives cash on an operating lease, which of the following accounts is increased? A. Lease Payable B. Interest Revenue: Leases C. Lease Receivable D. Rent Revenuearrow_forwardUnder a sales-type lease, what constitutes a gross investment in the lease? A. Aggregate of minimum lease payments and unguaranteed residual value. B. Present value of minimum lease payments plus present value of unguaranteed residual value. C. Absolute amount of minimum lease payments. D. Present value of minimum lease payments.arrow_forwardWhich of the following statements is false regarding the accounting for leases? The lessor may not use the straight-line basis for recognizing lease income under an operating lease if another systematic basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished. The amount of lease income recognized each year by the lessor under an operating lease is typically constant even though the contractual payments increase every year by a certain amount specified in the contract. A lessor includes initial direct costs incurred on the operating lease as part of the cost of the leased asset, and initial direct costs are to be recognized in profit or loss on the same basis as rent income is recognized. A lessor includes a rent collected in advance as part of the cost of the leased asset.arrow_forward
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