CFA Practice Question

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CFA Practice Question

Which of the following statements is true regarding the relationship between the amount charged as lease-related expenses for a capital lease in the first year and the amount that would be charged as rent expense had the lease been structured as an operating lease?

A. The capital lease expense is greater than the rent expense with an operating lease.
B. The capital lease expense is less than the rent expense with an operating lease.
C. There is not enough information to determine the relationship (depreciation method is not known).
Correct Answer: A

For a capital lease, lease expense is the sum of interest expense plus depreciation expense. Since interest is based on the entire present-value liability in year one, this sum is greater than the cash payment recorded as expense with an operating lease.

User Contributed Comments 4

User Comment
Nightsurfer (1) CL payment will be depreciation plus the first year interest charge (based on the full amount PV of MLPS)
nfressell2 What if depreciation used was Units of Production and the company did not produce any units?
ascruggs92 Depreciation doesn't matter in this question. If the question were about cash flow that would matter
khalifa92 this is the case for early years, in late years depreciation (due to decreased BV) and interest expense (due to decreased liability) decreases in comparison to OL.
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