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 this situation, the lessor would not be able to claim any tax deductions for depreciation since the asset's salvage value is zero. Therefore, the lessor would record an $80,000 lost tax shield at the end of the lease life (i.e. $200,000 x 40%). This is because the lessor would have been able to claim a tax deduction of $80,000 (i.e. $200,000 x 40%) over the life of the lease if they had owned the asset.

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