Average: 4 Attempts: A Aa 18. More on lease analysis across several situations w

Question

Average: 4 Attempts: A Aa 18. More on lease analysis across several situations where you may need to decide whether to lease or to buy assets, such as a car, a house, and so forth. You may have several opportunities where you may need to evaluate leases You may come equipment, from either a lessee's or a lessor's perspective. Thus, it is important to understand certain issues and benefits related to leases and the fine print used in lease contracts Based on your understanding of leases, which of the following statements are true? Statements True False Lease contracts in which residual values are very high are likely to have lowerOO costs for leasing A firm with leases instead of long-term loans is likely to appear stronger in superficial credit analysis i- A short-term lease with high annual payments wil increase reported expenses and decrease the reported proft, This would help ? firm save the alternative minimum tax (AMT) The concepts involved in the analysis of real estate leasing is contrary to the conoepts involved in the analysis of equipment leasing

Explanation / Answer

The first statement is TRUE as high residual value allows the lessor to lease out the asset several times. This ensures that they can afford to charge lower for such contracts. The statement is TRUE as leases, depending on the their nature, may generally end up on both the asset and liability side, whereas loans are put on the liability side, thus making the company look stronger in credit analysis. The statement is TRUE as the expenses related to the lease are put on the income statement, decreasing the reported profit and decreasing the corresponding tax. The statement in general is TRUE. Various concepts such as the rental fixation are different as rents are more market driven in the case of real estate leases. However, most of the concepts such as accounting treatments are similar to both the cases.

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