If in financial lease analysis an asset's undepreciated capital cost were $200,000 and its salvage or scrap value were zero, how would the lessor treat this situation if it were assumed the asset would be alone in its class if it were owned? The tax rate is 40%.
A)lessor would ignore this, since this is the lessor's business.
B)lessor would record this as an $80,000 lost tax shield at the end of the lease life.
C)lessor would record the $200,000 as a cost of leasing at the end of the lease.
D)lessor would record the $200,000 as a cost the beginning of the lease.

Question

Quizplus · Accepted Answer

In financial lease analysis, the lessor would consider the lost tax shield (tax savings foregone due to leasing instead of owning) at the end of the lease life. In this situation, since the asset has no salvage or scrap value, it would not generate any tax shield at the end of the lease life. Therefore, the lessor would record this as an $80,000 lost tax shield (40% tax rate multiplied by the undepreciated capital cost of $200,000) at the end of the lease life.

If in Financial Lease Analysis an Asset's Undepreciated Capital Cost