Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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Chapter 19, Problem 2Q
Distinguish between operating leases and financial leases. Would you be more likely to find an operating lease employed for a fleet of trucks or for a manufacturing plant?
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Distinguish between operating leases and financial leases. Would you bemore likely to find an operating lease employed for a fleet of trucks or for amanufacturing plant?
Distinguish between operating leases and financial leases. Would a firm be more likely tofinance a fleet of trucks or a manufacturing plant with an operating lease? Explain.
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.
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- Explain the concept of accounting for leases and the criteria used to determine whether a lease should be classified as an operating lease or a finance lease. Discuss the implications of lease accounting on a company's financial position and performance.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_forwardThe lessee compares the present value of owning the equipment with the present value of leasing it. Now put yourself in the lessor’s shoes. In a few sentences, how should you analyze the decision to write or not to write the lease?arrow_forward
- 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.arrow_forwardIn a lease that is not classified as a manufacturer's lease, initial direct cost is a. added to the cost of the asset to get the gross investment in the lease. b. added to the cost of the liability to get the net investment in the lease. c. added to the cost of the liability to get the gross investment in the lease. d. added to the cost of the asset to get the net investment in the lease.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
- 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_forwardExplain why companies frequently choose to lease assets and describe the basis for each of the criteria used to classify leases.arrow_forwardWhen are initial direct costs recognized in an operating lease? In a direct financing lease? In a sales-type lease? Why?arrow_forward
- Discuss the accounting and reporting requirements for leasing contracts with unique characteristics.arrow_forwardAssume a lessee leases equipment and insists on terms that qualify it as an operating lease, barely escaping the qualification as a capital lease. Discuss the impact that such an operating lease has on financial statements and related financial information as compared to the effect that a capital lease would have.arrow_forwardA lease is a financing instrument used by an entrepreneur to acquire assets for the business.describe and explain the two main types of leases, operating lease and finance lease, and include a discussion of the accounting treatment and tax impact of each. You may supplement your responses with research from outside sources.arrow_forward
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