- CFA Exams
- CFA Exam: Level I 2021
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 28. Non-current (Long-term) Liabilities
- Subject 8. Accounting and Reporting by the Lessee

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**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.

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**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. |