Question 1

An agreement that specifies that the party owning the asset records a lease receivable for lease payments and earns interest on the financing is best described as a:

Accepted Answer

A direct financing lease is a type of lease agreement where the lessor, who owns the asset, records a lease receivable for the lease payments and earns interest on the financing. This type of lease is common in the financing of equipment and vehicles, where the lessor does not aim to transfer ownership of the asset to the lessee at the end of the lease term but rather to earn interest on the financing provided.

Question 2

The obligation of which of the following appears on the lessee's balance sheet?

Accepted Answer

Capital leases are recorded on the lessee's balance sheet, reflecting the asset's value and the corresponding liability for future lease payments. Operating leases, on the other hand, are not capitalized, and their payments are considered operational expenses.

Question 3

Which of the following would not be affected by the lease classification as operating or capital? The leasee's:

Accepted Answer

The total cash flow of the lessee is not affected by the classification of the lease as operating or capital because the cash flows out of the company in either case. The distinction between operating and capital leases primarily affects the manner in which the lease is reported on the balance sheet and income statement, not the actual cash flow.

Question 4

Which of the following is not a motive for leasing an asset, rather than buy it?

Accepted Answer

Leasing an asset does not allow the lessee to use Modified Accelerated Cost Recovery System (MACRS) for tax purposes. MACRS is a method of depreciation for tax benefits on owned assets.

Question 5

Consider an asset that is being evaluated in a leasing versus purchase decision. The asset is costs $100,000 and is considered a 3-year MACRS asset. If the discount rate is 10%, the present value of depreciation tax shields is closest to:

Accepted Answer

The present value of depreciation tax shields is calculated by applying the MACRS depreciation rates to the asset's cost, multiplying by the tax rate, and discounting at the given rate. The MACRS rates for a 3-year asset are 33.33%, 44.45%, 14.81%, and 7.41%. Assuming a tax rate of 30%, the present value of the tax shields is closest to $33,289.

Question 6

Information on operating leases can be found in a company's:

Accepted Answer

Operating leases are disclosed in the footnotes to the financial statements, providing details on lease commitments and terms.

Quiz 20: Leasing