Question 1

Even with lease capitalization,the financial positions of lessors and lessees differ.Which of the following statements does not support that assertion?

Accepted Answer

The asset choice influenced by the method of financing does not directly relate to how the financial positions of lessors and lessees differ due to lease capitalization. This statement is more about the decision-making process regarding asset acquisition rather than the financial impact of lease capitalization on lessors and lessees.

Question 2

When deciding whether or not to lease an asset,the _____________ should be compared against the ______________,and if the first is lower then the company should proceed with the lease.

Accepted Answer

The answer of When deciding whether or not to lease...

Question 3

Which one of the following is a valid statement about leasing in Canada?

Accepted Answer

In Canada, it is common for lessees to purchase the asset at the end of the lease rather than returning it to the lessor (option A is therefore incorrect). Lessors may prefer to retrieve the equipment after the end of a lease, but this is not a universal preference and not a characteristic of leasing in Canada (option B is incorrect). Operating leases are typically used for shorter-term, non-permanent use of an asset, so option D is also incorrect.

Question 4

If the lease payments of the $800,000 asset were $210,000,first payment occurring at the beginning of the first year when the lease is signed,how would the lessee treat these payments in his financial lease analysis? His tax rate is 40%.

Accepted Answer

The lessee would treat the entire $210,000 payment as a cash outflow each year for five years. The payments are not deductible for tax purposes, as the asset is not owned by the lessee. Therefore, there would be no CCA deduction. The total net cash outflows for five years would be $1,050,000 ($210,000 x 5 years). Amortizing the $800,000 over five years and showing these inflows would be an incorrect approach, as the lessee is not receiving any inflows related to the asset.

Question 5

If a financial lease analysis shows a positive result,which one of the following is true?

Accepted Answer

If a financial lease analysis shows a positive result, it means that leasing is financially beneficial compared to owning the asset outright. Therefore, given the asset choice, the lease terms favour leasing. This does not necessarily mean that the user should own the asset or the lessor should own the asset, or that leasing is preferable only if there is no salvage value.

Question 6

Which rate should you use to discount the leasing cash flows in an NPV analysis?

Accepted Answer

The answer of Which rate should you use to discount...

Question 7

A lessor finds a lease attractive from a tax viewpoint because he:

Accepted Answer

By owning the asset and leasing it out, the lessor can claim capital cost allowance (CCA) on the asset, which creates a tax shield. This means that the lessor can deduct a portion of the asset's cost from their taxable income each year, reducing the overall taxes paid. Therefore, option D is the best choice. A, B, and C are incorrect as they do not fully capture the tax benefits of leasing from the lessor's perspective.

Question 8

Financial leasing is only justified by one of the following arguments.

Accepted Answer

Financial leasing is justified by the fact that a lessor can make better use of CCA tax shields than can a lessee. This is because the lessor is typically a larger, more diversified company with greater tax liability, which allows them to utilize tax savings more effectively than a lessee.

Question 9

If the asset described in above Question had a CCA rate of 30%,with the usual half-year rule,and were leased for 5 years,how would the lessee treat the five years of CCA? The lessee tax rate is 40%.The asset class uses declining balance.

Accepted Answer

The lessee would calculate the CCA amounts for each of the five years of the lease, apply the tax rate against these amounts, and show these amounts as cash outflows. This is because the lessee is responsible for paying the taxes on the leased asset, and the CCA would reduce the taxable income. As the asset class uses declining balance, the CCA rate of 30% would be applied to the undepreciated capital cost at the beginning of each year. The half-year rule would also be applied, meaning that only half of the CCA rate would be applied in the first year. Therefore, the lessee would need to calculate the CCA amount for each year using these rules. Finally, the lessee would apply their tax rate of 40% to these amounts to determine the amount of tax savings from the CCA, which would be shown as a cash outflow.

Question 10

Which of the following statements is not true of a financial lease?

Accepted Answer

A financial lease is a binding agreement between the lessor and the lessee for the duration of the lease term, which usually covers most of the economic life of the leased asset. It is a source of financing and creates a binding financial obligation for the lessee. However, it cannot be cancelled after the equipment is no longer needed, as the lessee is responsible for the payments for the entire lease term.

Question 11

Lease standardization helps justify leasing because:

Accepted Answer

Lease standardization can help lower costs by standardizing leased asset and security evaluations, making the process more efficient and less costly for lessors. It does not necessarily make all lessors pay the same lease payments or assist lessees in selecting similar assets, and while it may make it easier for lessors to investigate lessees, this is not the primary justification for leasing.

Question 12

If a lessor paid $800,000 for an asset,how would the lessee treat this amount in his financial lease analysis?

Accepted Answer

The answer of If a lessor paid $800,000 for an...

Question 13

If a lease analysis shows exactly the same present value as an equivalent loan,the lessee should:

Accepted Answer

If the lease analysis shows the same present value as an equivalent loan, it means that the lease and the loan have similar costs. Therefore, the lessee can choose to lease or buy based on other criteria such as cash flow, budget constraints, flexibility, and asset management. The decision should not be based on the tax shelters, salvage value, or asset choice since these factors are not relevant in this scenario.

Question 14

The lessee in a financial lease bears the most of the same risks and rewards as ownership except:

Accepted Answer

In a financial lease, the lessee bears most of the risks and rewards of ownership, but does not benefit from any extraordinary salvage value at the end of the lease term, as the asset typically returns to the lessor.

Question 15

Equipment manufacturers lease out equipment because:

Accepted Answer

Leasing agreements help support and expand sales by providing a way for customers to use equipment without the high upfront cost of purchasing it. This makes the equipment more accessible to a wider range of businesses and can ultimately lead to increased sales for the manufacturer.

Question 16

Which of the following is not a reason for leasing?

Accepted Answer

Leasing primarily benefits the lessee, not the lessor, in terms of insurance against obsolescence. The lessor is the owner of the asset, so the lessee avoids the risk of the asset becoming outdated.

Question 17

A financial lease is also called a full-payout lease because:

Accepted Answer

The answer of A financial lease is also called a...

Question 18

Canada Customs and Revenue Agency is suspicious of financial leases that exhibit the following non-lease characteristic:

Accepted Answer

All of the options except D are common characteristics of financial leases. However, if the lessee can acquire ownership of the asset without significant additional cost at the end of the lease term, it suggests that the lease is structured more like a purchase agreement than a true lease, which may raise concerns for tax or regulatory purposes.

Question 19

A leveraged lease requires a situation where:

Accepted Answer

A leveraged lease is a type of financing arrangement where the lessor borrows a large portion of the funds required to purchase the leased asset. The lessor then leases the asset to the lessee and uses the lease payments to repay the borrowed funds. This allows the lessor to obtain financing at a lower cost than if they were to finance the purchase of the asset entirely on their own. Option A, B, and D do not accurately describe the mechanics of a leveraged lease.

Question 20

Off-balance sheet financing implies that:

Accepted Answer

Off-balance sheet financing refers to the practice of keeping certain assets or liabilities off of a company's balance sheet, presenting a potentially misleading picture of its financial health. Leases are a common example of off-balance sheet financing. If a lease is classified as off-balance sheet financing, it will not be capitalized on the lessee's balance sheet, meaning that the asset or liability associated with the lease will not be recorded as an asset or liability on the balance sheet. Instead, the lease payments will be recorded as a rental expense on the income statement.

Quiz 17: Leasing