CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

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?
Correct Answer: True

When payments are made in advance, the asset balance will be greater than the liability balance throughout the lease term. This is true for a 5- to 10-year term and a 10% discount rate. The relationship between the asset balance and the capital lease obligation balance depends on the lease term and the discount rate.

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
thekid Why is the 5 year term and 10% discount Important?
2014 Good explanation, Kapila

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.
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