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Basic Question 10 of 16
Lessee Company leases equipment from Lessor Company. The term of the lease is 5 years and the discount rate is 10%. Lessor requires Lessee to make its annual payments in advance. The capital lease asset account will be greater than the obligation liability account on Lessee's books throughout the lease. True or False?
User Contributed Comments 7
| User | Comment |
|---|---|
| quynhnk79 | Why? it is not clear. Someone can explain? Thanks to you made in advance! |
| thekapila | At inception Asset = PV of MLP at 10% Liablity = PV of MLP at 10%. Since during period of lease Asset = Asset (inception) - Depreciation Liabity = Liability(Inception) - Prncipal payment. since payments are done in advance , so liability will be reduced and asset will be depreciated periodically |
| jainrajeshv | NICE EXPLANATION THE KAPILA |
| thekid | Why is the 5 year term and 10% discount Important? |
| 2014 | Good explanation, Kapila Thanks |
| gill15 | This Q is tough. The Kapila is right but wrong at the same time. For this case where the interest rate is 10% and the term is between 5-10 years the statement is true. But if the term is 4 years it NO longer is true or any other number out of the range. I'm an actuary and have done the math before and it's very tough to explain. |
| ashish100 | ^ This guy is captain obvious. And I am Stephen Hawking. My search of aliens landed me on this page somehow. Good luck everyone. |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
explain the financial reporting of leases from the perspectives of lessors and lessees
CFA® 2024 Level I Curriculum, Volume 2, Module 8.