Which of the following statements is most CORRECT?
A) Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure, in an amount sufficient to support the lease payment obligation.
B) The fixed charges associated with a lease can be as high as, but never greater than, the fixed payments associated with a loan.
C) Capital, or financial, leases generally provide for maintenance by the lessor.
D) A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment.
E) Finance leases usually have a cancelation feature.

Question

Quizplus · Accepted Answer

This statement accurately describes the key difference between capital leases and operating leases. Capital leases are designed to eventually transfer ownership of the asset to the lessee, so the lease payments are structured to provide the lessor with a return of and on their invested funds. In contrast, operating leases do not transfer ownership and may rely on the residual value of the leased asset to provide a return to the lessor. The other statements in the question either contain inaccuracies or incomplete information.

Which of the Following Statements Is Most CORRECT