Question 1

If a machine costs $50,000, and $5,000 a year for the lessor to maintain and insure, what equivalent annual cost would serve as the basis of a full-service lease payment for a six-year operating lease, paid in arrears, if the lessor's cost of capital is 8%?

Accepted Answer

The answer of If a machine costs $50,000, and $5,000...

Question 2

In the event of a lessor's bankruptcy, the lessor's legal position with the leased asset is this.

Accepted Answer

In the event of a lessor's bankruptcy, the leased asset is considered a separate asset from the lessor's other assets and is typically protected from seizure by the lessor's creditors. The lessee's rights and obligations are generally governed by the terms of the lease agreement, which may provide for continued use of the leased asset, transfer of the lease to a third party, or other arrangements. The lessor's bankruptcy does not necessarily invalidate the lease, although the lessee may need to seek relief from the bankruptcy court in order to continue to use the leased asset. The lessor's obligations to the lessee are limited to the terms of the lease agreement, and the lessee is not generally responsible for the lessor's debts or obligations to other parties. However, the lessee may need to negotiate with the lessor's creditors in order to protect its interest in the leased asset.

Question 3

Which one of the following is not a cash flow item in financial lease analysis?

Accepted Answer

The lessor's repayment schedule for financing the asset is not a cash flow item in financial lease analysis, as it pertains to the lessor's financing arrangements rather than the cash flows directly associated with the lease itself.

Question 4

Lease capitalization's value determination requires one of the following methods.

Accepted Answer

The most common method for determining the value of a lease capitalization is finding the net present value of future lease payments. This takes into account the time value of money and allows for more accurate valuation of the leased asset.

Question 5

Canada Customs and Revenue Agency is suspicious of financial leases that exhibit the following non-lease characteristic:

Accepted Answer

This characteristic suggests that the lease is actually a disguised sale, and the lessee is essentially purchasing the asset.

Question 6

If the present value of financial lease payments were $100,000, this capitalized amount would appear:

Accepted Answer

The present value of financial lease payments is recorded as both an asset and a liability on the lessee's balance sheet, reflecting the right to use the asset and the obligation to make lease payments.

Question 7

If the lease payment for the machine in Question 53 were made in advance, starting at the beginning of the first year of the contract, what would the size of such a payment now be as an equivalent annual cost?

Accepted Answer

The answer of If the lease payment for the machine...

Question 8

Following the time sequence described in Table 22.1, and using the information from Questions 57 through 63, what would the present value of cash flows be for leasing this $800,000 asset if the lessee's before tax cost of capital were 15%? Note that the asset is scrapped and alone in its pool at the time of disposition.

Accepted Answer

The answer of Following the time sequence described in Table...

Question 9

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%.

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.

Question 10

If the lease payments of the $800,000 asset described in Question 57 were $210,000, first payment occurring at the beginning of the first year when the lease is signed, how would the lessee treat these payments in his financial lease analysis? His tax rate is 40%.

Accepted Answer

The lessee would record net cash outflows for five years of $126,000 for leasing. This is because the lease payments are $210,000 per year, and the lessee can deduct 40% of this amount, or $84,000, from his taxable income. This results in a net cash outflow of $126,000 per year.

Question 11

Which one of the following characteristics does not distinguish financial leases from operating leases?

Accepted Answer

All of the other choices distinguish financial leases from operating leases. Financial lease analysis compares leasing to borrowing, financial leases are not cancelable, and operating leases do not extend over the economic life of the asset (usually only a portion). However, the involvement of real physical assets is a characteristic that is shared by both types of leases.

Question 12

If the asset in Question 64 were exactly equal to its undepreciated capital cost instead of zero, what effect would this change have on the financial lease analysis?

Accepted Answer

If the asset were equal to its undepreciated capital cost, the terminal loss would disappear. However, the salvage would now be considered a leasing cost instead of a benefit. Therefore, the correct choice is D, "The terminal loss would disappear and the salvage is now a leasing cost."

Question 13

Even with lease capitalization, the financial positions of lessors and lessees differ.Which of the following statements does not support that assertion?

Accepted Answer

The method of financing (lease vs. purchase) does not inherently affect the asset choice itself, but rather how it is accounted for, thus not directly supporting the assertion about differing financial positions.

Question 14

Because salvage value is a more risky estimate than others in lease analysis, one might do one of the following:

Accepted Answer

Ignoring salvage value in lease analysis would result in an incomplete analysis. Reducing the salvage value by half is arbitrary and not based on any data or analysis. Arranging to sell the asset ahead of time is not always possible. Therefore, using a higher, risk-adjusted discount rate for salvage value estimates is the best choice as it takes into account the uncertainty and risk associated with salvage value estimates.

Question 15

If a lessor paid $800,000 for an asset, how would the lessee treat this amount in his financial lease analysis?

Accepted Answer

The answer of If a lessor paid $800,000 for an...

Question 16

Which of the following is not a normally attractive feature of an operating lease?

Accepted Answer

An operating lease is typically attractive because it allows the lessee to use the asset without the financial burden of purchasing it, but affordability is not a feature of the lease itself.

Question 17

What is the undepreciated capital cost of Question 57's $800,000 asset after five CCA calculations of 30% declining balance, with the half-year rule?

Accepted Answer

The undepreciated capital cost (UCC) is the original cost of the asset minus any depreciation taken so far.

For the first year, the half-year rule means only half the rate of depreciation can be taken, so the CCA deduction would be: 
$800,000 x 30% x 0.5 = $120,000

Therefore, the UCC after the first year would be: 
$800,000 - $120,000 = $680,000

For the second year, the calculation would be: 
($680,000 x 30%) = $204,000

UCC: $680,000 - $204,000 = $476,000

For the third year: 
($476,000 x 30%) = $142,800

UCC: $476,000 - $142,800 = $333,200

For the fourth year: 
($333,200 x 30%) = $99,960

UCC: $333,200 - $99,960 = $233,240

For the fifth year: 
($233,240 x 30%) = $69,972

UCC: $233,240 - $69,972 = $163,268

Therefore, the answer is C) $163,268

Question 18

If the asset described in Question 57 had a CCA rate of 30%, with the usual half-year rule, and were leased for 5 years, how would the lessee treat the five years of CCA? The lessee tax rate is 40%.The asset class uses declining balance.

Accepted Answer

Since the asset is being leased, the lessor is the owner of the asset and entitled to claim the CCA. However, as part of the lease agreement, the lessor may pass on some or all of the tax benefits to the lessee by providing a lower lease rate. In this case, the lessee would need to calculate the CCA amounts for each of the five years, apply their tax rate against these amounts, and show the resulting amounts as cash outflows. This would accurately reflect the tax savings benefit received by the lessee.

Question 19

In the event of lessee bankruptcy, the lessor's legal position with the leased asset is this:

Accepted Answer

In the event of lessee bankruptcy, the lessor has the right to take back the leased asset, but there are no salvage guarantees. This means that the lessor may have to sell the asset in its current condition and is not guaranteed to recoup the full value. However, the lessor's ability to repossess the asset is a form of recourse in this situation. The lessor may also still have the option to pursue the lessee for any outstanding lease payments due.

Question 20

What would the CCA tax shields be for Years 0 and 4, assuming these tax shields start in Year 0 and end in Year 4? Remember: CCA = 30%.

Accepted Answer

The CCA tax shield for Year 0 is calculated as 30% of the initial cost, which is $48,000. For Year 4, the tax shield is calculated based on the remaining undepreciated capital cost, resulting in $27,989.

Quiz 17: Payout Policy