Question 1

Which of the following factors will classify a lease as a capital lease for accounting purposes?
If the lease transfers ownership of the asset to the lessee by the end of the lease, this will classify
the lease as a capital lease for accounting purposes.

Accepted Answer

If the lease transfers ownership of the asset to the lessee by the end of the lease, it meets one of the criteria to be classified as a capital lease, as outlined in accounting standards. Other criteria include the lease term being for a major part of the asset's useful life, or the present value of lease payments being greater than a certain percentage of the asset's fair value.

Question 2

In computing the NPV of the lease/buy decision, the cost of the equipment to be leased represents
a cash inﬂow to the lessor and a cash outﬂow to the lessee.

Accepted Answer

The cost of the equipment to be leased represents a cash outflow to the lessee, but it does not represent a cash inflow to the lessor. The lessor may receive payments from the lessee, but the initial cost of the equipment is not a cash inflow for the lessor.

Question 3

The cost of the asset if purchased today following should be included in a lease-purchase analysis.

Accepted Answer

The cost of the asset if purchased today is a crucial factor to be included in a lease-purchase analysis as it helps in determining the overall cost-effectiveness and feasibility of the leasing arrangement compared to buying the asset outright.

Question 4

For a lease to be deemed valid by the CRA for tax purposes, the purpose of the lease must NOT be
primarily for the purpose of tax avoidance.

Accepted Answer

The CRA requires that a lease be entered into for valid business purposes and not solely for the purpose of reducing taxes.

Question 5

The amount of the lease payment following should be included in a lease-purchase analysis.

Accepted Answer

The lease payment is a significant factor in the lease-purchase analysis, as it determines the cost of leasing and ultimately, whether it is more financially beneficial to lease or purchase the asset. Therefore, it should always be included in the analysis.

Question 6

The amount of the depreciation tax shield following should be included in a lease-purchase
analysis.

Accepted Answer

The depreciation tax shield should be included in a lease-purchase analysis because it can affect the net cost of owning the asset.

Question 7

Based upon the standards issued by CICA, a ﬁnancial lease must be capitalized if the lease term is
75% or more of the estimated economic life of the asset.

Accepted Answer

According to CICA standards, a financial lease must be capitalized if the lease term is 75% or more of the estimated economic life of the asset.

Question 8

A sale and leaseback arrangement must be disclosed on the ﬁrm's balance sheet, according to
generally accepted accounting principles.

Accepted Answer

A sale and leaseback arrangement involves the sale of an asset and the leasing back of that same asset. As a result, the arrangement must be disclosed on the firm's balance sheet in accordance with generally accepted accounting principles.

Question 9

If borrowing to purchase the asset would subject the ﬁrm to debt-related restrictions, then this
scenario makes the asset a likely candidate for leasing.

Accepted Answer

If the firm is subject to debt-related restrictions, then leasing may be a more favorable option since leasing is not considered debt and therefore does not have the same restrictions.

Question 10

Calvada Productions signs a lease agreement with Lessor, Inc. According to the terms of the lease,
ownership of the leased asset will be transferred to Calvada at the end of the lease term for
$5,000, which is estimated to be the fair-market value of the asset at that time. This lease should be
classiﬁed as an operating lease for accounting purposes.

Accepted Answer

Based on the information given, this should be classified as a finance lease rather than an operating lease, as ownership of the asset is intended to transfer to the lessee at the end of the lease term for a predetermined amount.

Question 11

According to CRA's regulations, the lessee may not be able to deduct lease payments for tax
purposes if the primary purpose of the lease is tax avoidance.

Accepted Answer

According to CRA's regulations, the lessee may not be able to deduct lease payments for tax purposes if the primary purpose of the lease is tax avoidance.

Question 12

The amount of the beneﬁt to be derived from the use of the asset should be included in a lease-
purchase analysis.

Accepted Answer

The answer of The amount of the beneﬁt to be...

Question 13

Based upon the standards issued by CICA, a ﬁnancial lease must be capitalized if the PV of the
lease payments is at least 75% of the fair market value of the asset at the commencement of the
lease.

Accepted Answer

The answer of Based upon the standards issued by CICA,...

Question 14

Based upon the standards issued by CICA, a ﬁnancial lease must be capitalized if the lessee
receives title to the asset by the end of the lease term.

Accepted Answer

According to the standards issued by CICA (now replaced by CPA), a financial lease must be capitalized if it meets any one of the following conditions: (1) the lease transfers ownership of the asset to the lessee by the end of the lease term, (2) the lease contains a bargain purchase option (BPO) wherein the lessee can purchase the asset at a price lower than its fair value, (3) the lease term is for a major part of the economic life of the asset, or (4) the present value of the minimum lease payments equals or exceeds substantially all of the fair value of the asset. Therefore, if the lessee receives title to the asset by the end of the lease term, it must be capitalized.

Question 15

The decision to lease or purchase an asset is best characterized as a ﬁnancing decision rather than
an investment decision.

Accepted Answer

Leasing or purchasing an asset involves determining the best way to finance the acquisition of the asset, making it a financing decision. The decision does not directly involve evaluating the potential returns or profitability of the asset, which would characterize it as an investment decision.

Question 16

Tax-reduction is a legitimate reason for leasing.

Accepted Answer

When leasing a car for business purposes, the lease payments can usually be deducted as business expenses, reducing taxable income. Therefore, tax-reduction can be a legitimate reason for leasing.

Question 17

All else equal, the lower the cost of the equipment to be leased, the greater the net advantage to
leasing (NAL) to the lessee.

Accepted Answer

The net advantage to leasing (NAL) is determined by comparing the cost of leasing to the cost of purchasing. Lower equipment cost does not automatically mean a greater NAL; factors like lease terms, interest rates, and tax implications also play significant roles.

Question 18

The incremental cash ﬂows of leasing considers the cost of the asset, the lease payment amount,
the applicable tax rate, and the annual depreciation expense

Accepted Answer

The incremental cash flows of leasing do take into account the cost of the asset, the lease payment amount, the applicable tax rate, and the annual depreciation expense.

Question 19

The residual value to the lessor at the end of the lease term is considered a relevant input into the
leasing decision.

Accepted Answer

The answer of The residual value to the lessor at...

Question 20

According to CRA's regulations, the existence of a bargain purchase option will not affect the ability
of the lessee to deduct the lease payments from taxable income.

Accepted Answer

According to CRA (Canada Revenue Agency) regulations, the existence of a bargain purchase option can affect the classification of a lease as either a capital lease or an operating lease. If a lease is classified as a capital lease (which might be influenced by the presence of a bargain purchase option), the lessee cannot deduct the entire amount of the lease payments from taxable income. Instead, they can deduct depreciation and interest expense components of the lease payments.

Quiz 22: Behavioral Finance: Implications for Financial Management

Which of the following factors will classify a lease as a capital lease for accounting purposes? If the lease transfers ownership of the asset to the lessee by the end of the lease, this will classify the lease as a capital lease for accounting purposes.

In computing the NPV of the lease/buy decision, the cost of the equipment to be leased represents a cash inﬂow to the lessor and a cash outﬂow to the lessee.

The cost of the asset if purchased today following should be included in a lease-purchase analysis.

For a lease to be deemed valid by the CRA for tax purposes, the purpose of the lease must NOT be primarily for the purpose of tax avoidance.

The amount of the lease payment following should be included in a lease-purchase analysis.

The amount of the depreciation tax shield following should be included in a lease-purchase analysis.

Based upon the standards issued by CICA, a ﬁnancial lease must be capitalized if the lease term is 75% or more of the estimated economic life of the asset.

A sale and leaseback arrangement must be disclosed on the ﬁrm's balance sheet, according to generally accepted accounting principles.

If borrowing to purchase the asset would subject the ﬁrm to debt-related restrictions, then this scenario makes the asset a likely candidate for leasing.

According to CRA's regulations, the lessee may not be able to deduct lease payments for tax purposes if the primary purpose of the lease is tax avoidance.

The amount of the beneﬁt to be derived from the use of the asset should be included in a lease- purchase analysis.

Based upon the standards issued by CICA, a ﬁnancial lease must be capitalized if the PV of the lease payments is at least 75% of the fair market value of the asset at the commencement of the lease.

Based upon the standards issued by CICA, a ﬁnancial lease must be capitalized if the lessee receives title to the asset by the end of the lease term.

The decision to lease or purchase an asset is best characterized as a ﬁnancing decision rather than an investment decision.

Tax-reduction is a legitimate reason for leasing.

All else equal, the lower the cost of the equipment to be leased, the greater the net advantage to leasing (NAL) to the lessee.

The incremental cash ﬂows of leasing considers the cost of the asset, the lease payment amount, the applicable tax rate, and the annual depreciation expense

The residual value to the lessor at the end of the lease term is considered a relevant input into the leasing decision.

According to CRA's regulations, the existence of a bargain purchase option will not affect the ability of the lessee to deduct the lease payments from taxable income.