ACFIChapter 21 Leases Solutions
CHAPTER 21
Accounting for Leases
ANSWERS TO QUESTIONS
**1. The major lessor groups in the United States are banks, captives, and independents. Captives have the point of sale advantage in finding leasing customers; that is, as soon as a parent receives a possible order, a lease financing arrangement can be developed by its leasing subsidiary. Furthermore, the captive (lessor) has the product knowledge which gives it an advantage when financing the parents’ product. The current trend is for captives to focus on the company’s products rather than to do general lease financings.
**2. (a) Possible advantages of leasing: 1. Leasing permits the write-off of the full cost of the assets (including any land and residual value), thus providing a possible tax advantage. 2. Leasing may be more flexible in that the lease agreement may contain less restrictive provisions than the bond indenture. 3. Leasing permits 100% financing of assets. 4. Leasing may permit more rapid changes in equipment, reduce the risk of obsolescence, and pass the risk in residual value to the lessor or a third party. 5. Leasing may have favorable tax advantages. 6. Potential of off-balance-sheet financing with certain types of leases.
Assuming that funds are readily available through debt financing, there may not be great advantages (in addition to the above-mentioned) to signing a noncancelable, long-term lease. One of the usual advantages of leasing is its availability when other debt financing is unavailable.
(b) Possible disadvantages of leasing: 1. In an ever-increasing inflationary economy, retaining title to assets may be desirable as a hedge against inflation. 2. Interest rates for leasing often are higher and a profit factor may be included in addition. 3. In some cases, owning the asset provides unique tax advantages, such as when bonus depreciation is permitted.
(c) Since a long-term noncancelable lease which is used as a financing device generally results in
Accounting for Leases
ANSWERS TO QUESTIONS
**1. The major lessor groups in the United States are banks, captives, and independents. Captives have the point of sale advantage in finding leasing customers; that is, as soon as a parent receives a possible order, a lease financing arrangement can be developed by its leasing subsidiary. Furthermore, the captive (lessor) has the product knowledge which gives it an advantage when financing the parents’ product. The current trend is for captives to focus on the company’s products rather than to do general lease financings.
**2. (a) Possible advantages of leasing: 1. Leasing permits the write-off of the full cost of the assets (including any land and residual value), thus providing a possible tax advantage. 2. Leasing may be more flexible in that the lease agreement may contain less restrictive provisions than the bond indenture. 3. Leasing permits 100% financing of assets. 4. Leasing may permit more rapid changes in equipment, reduce the risk of obsolescence, and pass the risk in residual value to the lessor or a third party. 5. Leasing may have favorable tax advantages. 6. Potential of off-balance-sheet financing with certain types of leases.
Assuming that funds are readily available through debt financing, there may not be great advantages (in addition to the above-mentioned) to signing a noncancelable, long-term lease. One of the usual advantages of leasing is its availability when other debt financing is unavailable.
(b) Possible disadvantages of leasing: 1. In an ever-increasing inflationary economy, retaining title to assets may be desirable as a hedge against inflation. 2. Interest rates for leasing often are higher and a profit factor may be included in addition. 3. In some cases, owning the asset provides unique tax advantages, such as when bonus depreciation is permitted.
(c) Since a long-term noncancelable lease which is used as a financing device generally results in