Chapter 18 Case Study
Page 758
As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a 4-year guideline lease on the equipment, including maintenance, for payments of $260,000 at the beginning of each year. Lewis’s marginal federal-plus-state tax rate is %401. You have been asked to analyze the lease-versus-purchase decision and, in the process, to answer the following questions.
a. (1) Who are the two parties to lease a transaction?
Lease transactions involve two parties: the lessor, who owns the property and the lessee, who obtains the property
(2) What are the five primary types of leases, and what are their characteristics? Operating Leases- provide for both financing and maintenance
Capital Leases- Do Not provide for maintenance, Are Not cancellable, and are fully amortized.
Sale-and –Lease back Arrangement- Do Not provide for maintenance, Are not cancellable, and are fully amortized. The item being leased is used.
Combination Leases- has characteristics like Operating and Capitol leases but also contains a cancellation clause.
Synthetic Leases – Keeps debt off of the company balance sheet. Is not amortized. Short term and brought from a 3rd party.
(3) How are leases classified for tax purposes?
Provided that the IRS agrees that a particular contract is a genuine lease and not simply a loan called a lease. Must be a guideline lease.
(4) What effects does leasing have on a firm’s balance sheet?
Leasing is considered off-balance sheet financing. Neither the leased assets nor the liabilities under the lease contract appear directly on the balance sheet. But with statement 13 if a firm signs a financial lease contract its obligation to repay that lease is the same as it is a loan. Therefore the leased asset must be reported as a fixed asset and the present value