Ch 16 Leases Flashcards
(19 cards)
What are the key features of leasing as a form of debt?
Leasing is like debt because it involves a non-cancelable, long-term agreement, and companies must disclose leasing obligations on financial statements.
What are the two main types of leases?
1) Capital (Financing) Lease 2) Operating Lease
What is a capital (financing) lease?
A capital lease is essentially a purchase of the asset. The firm buys the property through the lease and it must be recorded on the balance sheet.
What is an operating lease?
An operating lease is a conventional rental agreement. The firm does not expect to own the asset, and it is not recorded on the balance sheet.
What are the four conditions that identify a capital lease?
1) Ownership transferred at lease end
2) Bargain purchase option
3) Lease term is ≥ 75% of the asset’s life
4) PV of payments is ≥ 90% of the asset’s fair value
What are the main characteristics of an operating lease?
1) No ownership transfer
2) No obligation on balance sheet
3) Used for short-term rentals of assets (e.g., office equipment).
What is one major advantage of leasing over loans?
Leasing often requires no down payment, whereas loans typically do.
What’s a key difference between leasing and loans?
Leases generally have fewer restrictions than loans, providing greater flexibility.
What advantage do leasing companies offer that loans typically do not?
Leasing companies provide expert product selection, maintenance, and eventual resale of the asset
How does leasing benefit a company in case of bankruptcy?
Leasing can restrict creditor claims in bankruptcy, offering protection for the company.
Why might leasing be preferable for equipment with rapid obsolescence?
Leasing is often better for assets like computers, which may quickly become outdated and lose value.
How can leasing provide tax advantages?
Leasing can offer deductions for lease payments as expenses, potentially lowering taxable income.
How is leasing similar to purchasing an asset?
In both cases, the firm’s assets and liabilities increase on the balance sheet.
How do capital leases affect financial statements?
They increase both assets and liabilities, as the lease obligation is recorded at the present value of payments.
What is the key accounting similarity between leasing and purchasing an asset?
Both result in an increase in assets and liabilities on the balance sheet.
How is the value of a capital lease determined on the balance sheet?
The value is based on the present value (PV) of the future lease payments.
What does a capital lease show on the balance sheet?
It shows both the leased asset and a corresponding lease liability.
When is a lease payment typically made in the context of a capital lease?
Payments are often made at the end of the year, but may vary depending on the lease agreement.
How does leasing compare to borrowing for purchasing an asset?
Both increase assets and liabilities. The main difference is that in leasing, the asset is not owned by the firm, while in borrowing, the firm purchases the asset.
