24. Assume the following finance/capital lease: Present value (PV) of lease paym

Question

24. Assume the following finance/capital lease: Present value (PV) of lease payments at 12 percent is $25,000. .The leased asset is depreciated straight line over 6 years. . The lease payments of $6,080.64 will be paid annually at the end of the year. As compared to an operating lease, the lessee's pretax earnings under a finance/capital lease in year 1 will be: A) lower by $1,086 B) higher by $1,086 C) lower by $3,000 D) higher by $3,000 25. An analyst is reviewing a company's financial statements and making necessary adjustments. Which of the following statements is least likely correct concerning the adjustments? A) If the analyst observes that the company has operating leases he should find the present value of the operating lease payments and add this to the firm's total assets and total debt. If the analyst determines that the firms Deferred Tax Liability (DTL) is likely to reverse, s/he should find the present value of the DTL and treat it as a liability If the firm has convertible bonds and the stock price is less than the conversion price, the analyst should treat the bonds as equity because it is likely the bonds will be converted B) C)

Explanation / Answer

25) There is no requirement of adding present value of operating lease payments to the total assets and total debts(A)

If it is operating lease, expense of lesses per annum would be $6080.64

If it is financial lease, Expense would be interest and depreciation

Interest cost @ year 1 would be 25,000 * 12% = 3000 $

Depreciation = 25,000 / 6 = 4166.67

Total expenditure under finance lease @ year 1 = 7166.67

As compared to operating lease,in financial lessee's pre tax income would be lower (due to more expenditure) by (7166.67 - 6080.64) = 1086$ (A)

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

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