PRIN.OF CORPORATE FINANCE
PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 25, Problem 1PS

Types of lease* The following terms are often used to describe leases:

  1. a. Direct
  2. b. Full-service
  3. c. Operating
  4. d. Financial
  5. e. Net
  6. f. Leveraged
  7. g. Sale and lease-back

Match one or more of these terms with each of the following statements:

  1. A. The initial lease period is shorter than the economic life of the asset.
  2. B. The initial lease period is long enough for the lessor to recover the cost of the asset.
  3. C. The lessor provides maintenance and insurance.
  4. D. The lessee provides maintenance and insurance.
  5. E. The lessor buys the equipment from the manufacturer.
  6. F. The lessor buys the equipment from the prospective lessee.
  7. G. The lessor finances the lease contract by issuing debt and equity claims against it.
Expert Solution & Answer
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Summary Introduction

To discuss: Match the given terms with the suitable statements.

Explanation of Solution

The given terms are matched with the appropriate statements as follows:

PRIN.OF CORPORATE FINANCE, Chapter 25, Problem 1PS

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  • Use the following information to decide whether this equipment lease qualifies as an operating, sales-type, or direct financing lease to a lessor. a. There is no transfer of ownership at the end of the lease term. There is no bargain purchase option. The lease term is 60% of the economic life of the leased property. The present value of lease payments, including a residual value guaranteed by the lessee, is 100% of the fair value of the leased property to the lessor. The collectability of the lease payments is reasonably assured. The leased asset was not of a specialized nature. b. Same as (a), except that the residual value is guaranteed by a third party, not the lessee. The present value of the residual value guarantee is 15% of the fair value of the leased property. c. Same as (a), except that: the present value of the lease payments, including a residual value guaranteed by the lessee, is only 50% of the fair value of the leased asset. The collectability of the minimum lease payments is not predictable.
    Define each of the following terms: a. Lessee; lessor b. Operating lease; financial lease; sale-and-leaseback; combination lease; synthetic lease; SPE c. Offbalance sheet financing; capitalizing d. FASB Statement 13; ASU 2016-02 e. Guideline lease f. Residual value g. Lessees analysis; lessors analysis h. Net advantage to leasing (NAL) i. Alternative minimum tax (AMT)
    A lease agreement whereby the lessor shall recognized gross profit at inception of the lease? a. Multi-agreement lease b. Direct finance lease c. Operating lease d. Dealers lease
  • Answer 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. 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 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…
    In 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.
    See attached picture   1. Duscuss the nature of this lease in relation to the lessor and compute the amount of each of the following items:  A. Lease receivable at inception of the lease  B. Sales Price  C. Cost of sales
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