Question 1

In an analysis of a lease versus purchase of an asset, only incremental cash flows that are different under the two alternatives are included.

Accepted Answer

Only incremental cash flows that are different under the two alternatives are considered in the lease versus purchase decision analysis because they are the only cash flows that are impacted by the choice between the two alternatives.

Question 2

The minimum lease payment a lessor may charge is set so that the Net Present Value of the cash flows associated with the lease is zero

Accepted Answer

The minimum lease payment is set so that the lessor's initial investment is recovered over the lease term, plus a reasonable rate of return.

Question 3

If a company's cost of borrowing is 12% and its cost of capital is 7%, the salvage value of an asset should be discounted at 12%

Accepted Answer

The salvage value of an asset should be discounted at the company's cost of borrowing, which is 12%. This is because the salvage value represents the amount that could be obtained from selling the asset at the end of its useful life, and the company will need to borrow funds to purchase a replacement asset. The cost of capital, which includes both the cost of borrowing and the cost of equity, is used to evaluate investment opportunities and is not directly related to the salvage value of an asset.

Question 4

At the end of the term of the lease agreement, the salvage value of an asset, if any, is realized by the lessee.

Accepted Answer

The answer of At the end of the term of...

Question 5

A terminal loss is a benefit to purchasing the asset since such a loss is deductible for tax purposes

Accepted Answer

A terminal loss is a loss that occurs when an asset is sold for less than its undepreciated capital cost. This loss is deductible for tax purposes, which can be a benefit to the purchaser of the asset.

Question 6

With a financial lease, the lessor receives more than the asset's purchase price and earns its required return on the investment.

Accepted Answer

With a financial lease, the lessor receives lease payments that are higher than the cost of the asset and include interest charges, allowing the lessor to earn a rate of return on the investment.

Question 7

Off-balance-sheet financing is no longer permitted in Canada

Accepted Answer

Off-balance-sheet financing is no longer permitted in Canada due to new regulations implemented in 2019.

Question 8

The most important reason why leasing has grown so popular as a form of financing is the in-flow of large amounts of low-cost capital that makes attractive deals possible.

Accepted Answer

The availability of low-cost capital has enabled leasing companies to offer more attractive deals to customers, making leasing a popular form of financing.

Question 9

A sale-leaseback arrangement may be used to alleviate a company's cash flow problems.

Accepted Answer

In a sale-leaseback arrangement, a company sells its property to a buyer and then leases it back from the buyer. This can provide the company with an infusion of cash while allowing them to retain the use of the property. The cash infusion can help alleviate cash flow problems.

Question 10

An asset's undepreciated capital cost before sale is $6 588. The asset is sold for $4 551 and its original cost was $17 500. There is a terminal loss of $2 037 in this case.

Accepted Answer

The terminal loss should be calculated as ($6,588 - $4,551) = $2,037, which is equal to the difference between the undepreciated capital cost before sale and the proceeds from the sale. Therefore, there is no terminal loss in this case.

Question 11

An operating lease and a financial lease have the same general characteristic: they both allow the lessee to use an asset in exchange for stated periodic payments.

Accepted Answer

Both types of leases involve the use of an asset in exchange for payments, but there are differences in terms of ownership, duration, and accounting treatment.

Question 12

All leases, financial as well as operational, must be capitalized and disclosed on a company's financial statements.

Accepted Answer

The answer of All leases, financial as well as operational,...

Question 13

CICA regulations require explicit disclosure of financial lease obligations on the firm's balance sheet.

Accepted Answer

CICA (Canadian Institute of Chartered Accountants) regulations require that financial lease obligations be disclosed on a firm's balance sheet. This is because financial leases are considered a type of financing and represent a liability to the company. By disclosing these obligations, investors and other stakeholders can better understand a company's financial position and overall risk.

Question 14

If an asset qualifies for the investment tax credit (ITC), 10% of the asset's purchase cost can bededucted from federal tax payable.

Accepted Answer

This statement is true. If an asset qualifies for the investment tax credit (ITC), 10% of the asset's purchase cost can be deducted from federal tax payable.

Question 15

If the lessee is required to buy the asset at any time in the leasing period, including at the end of the lease, the Canada Revenue Agency (CRA) may rule the contract a conditional sales arrangement and not a lease.

Accepted Answer

This statement is true according to the guidelines set forth by the Canada Revenue Agency (CRA) for determining whether a contract is a true lease or a conditional sales arrangement. If the lessee is required to purchase the asset at any point during the lease, including at the end of the lease, it may be considered a conditional sales arrangement and not a lease for tax purposes.

Question 16

A financial lease seldom includes a renewal option.

Accepted Answer

A financial lease is a type of lease where the lessee (the person or company leasing the asset) is responsible for the maintenance, insurance, and other costs associated with the asset during the lease term. Unlike an operating lease, a financial lease does not typically include a renewal option, meaning that the lessee does not have the option to renew the lease at the end of the term. Rather, the lessee is typically required to return the asset or purchase it at the end of the lease term.

Question 17

The lessor is the party to the leasing contract who, under the lease contract, owns the asset and receives the lease payments.

Accepted Answer

This is the correct definition of a lessor in a leasing contract.

Question 18

If an operational lease is capitalized and disclosed on a company's financial statements, the presentvalue of all remaining lease payments is calculated and entered as an asset termed "Assets underlease", while a corresponding liability is entered as "Obligations under lease".

Accepted Answer

This statement is correct. When an operational lease is capitalized and disclosed on a company's financial statements, the present value of all remaining lease payments is entered as an asset termed "Assets under lease", while a corresponding liability is entered as "Obligations under lease". This reflects the amount of future lease payments that the company has committed to making under the terms of the lease agreement.

Question 19

If the present value of the cost of leasing an asset exceeds the present value of the cost of purchasing it, the company should purchase the asset

Accepted Answer

The present value of the cost of leasing an asset often exceeds the present value of the cost of purchasing it in the long run due to interest payments and other costs associated with leasing. Therefore, purchasing the asset may be a financially smarter choice.

Question 20

When Bantoline Industries and National Leasing Limited entered into a contractual arrangement,one of the stipulations in the contract allowed for National Leasing to sell the leased property backto Bantoline. Leasing contracts with this type of stipulations are called sale-leaseback arrangements.

Accepted Answer

A sale-leaseback arrangement involves selling an asset and leasing it back, not a stipulation to sell leased property back to the lessor.

Quiz 16: Lease Financing: Concepts and Techniques