A firm seeing to acquire an asset essential to its operations can either buy the

Question

A firm seeing to acquire an asset essential to its operations can either buy the asset or lease it. A company may argue that leasing versus purchasing allows it to borrow less money, yet the reality is that failure to make a lease payment will result in the loss of use of the asset just as assuredly as not paying the interest on debt. No different from buying versus leasing a car; if you don’t pay, the asset goes away.

That being said, leasing provides some benefits to the lessee. Which of the following are advantages to using operating leases:

Select one:

a. Company may only need use of the asset for a period of time.

b. Loss making firms that cannot benefit from the tax benefits of buying (depreciation, interest expense) are more likely to lease.

c. Tax policy can drive mutual advantages. For example, in the 1970’s, when U.S. citizens were facing confiscatory marginal tax rates of as high as 70% or more, the investor/capital provider would purchase an asset, obtain the tax benefits of the depreciation on the asset, and then lease it to the entity with the lower marginal tax rate.

d. All of the above

Explanation / Answer

advantages to using operating leases:

The correct option is: d. All of the above

Explanation:

a. Company may only need use of the asset for a period of time.
The Asset can be used for a short period of time, the lease term is less than 75 percent of the estimated economic life of the equipment.
Therefore, company can use as per their requirement (not as per the useful life of the asset).

b. Loss making firms that cannot benefit from the tax benefits of buying (depreciation, interest expense) are more likely to lease.
One of the most popular advantages of operating leases is the potential tax benefits. A lease may allow you to deduct your payments as operating expenses during the period in which you pay them. If you purchase equipment, you may be able to deduct the interest, as well as the cost of the depreciation.

c. Tax policy can drive mutual advantages.
Yes,  long-term capital gains are taxed for lower rate compared to ordinary income and short-term capital gains

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.