Ch 19: Assignment - Lease Financing Leasing is often referred to as off-balance sheet financing because of the way that the transaction is treated and reported in financial statements. Which of the following statements best describes the characteristics of off-balance-sheet financing? Neither the leased assets nor the leased liabilities under the lease contract appear directly on the firm's balance sheet Only the leased asset but not the leased liabilities under the lease contract appears directly on the firm's balance sheet Both the leased assets and the leased liabilities under the lease contract appear directly on the firm's balance sheet. Only the leased liabilities but not the leased assets under the lease contract appear directly on the firm's balance sheet. Consider the following statement on capital leases: If a lease term is more than 80% of the asset's life and the leased property is transferred from the lessor to the lessee, then the lease must be capitalized and disclosed on a firm's balance sheet. Is the preceding statement true or false? False True To consider the financial statement effects of leasing versus purchasing an asset, review the following case of Hack Wellington Company Hack Wellington Company needs equipment that will cost the company $800. Hack Wellington Company is considering to either purchase the equipment by borrowing 5800 from a local bank or leasing the equipment. Assume that the lease will be structured as an operating lease Some data from Hack Wellington Company's current balance sheet prior to the lease or purchase of the equipment are: Balance Sheet Data (Dollars) $4,200 Debt 1,800 Equity $6,000 Total claims Current assets Net fixed assets Total assets $2,400 1. The company's current debt ratio is 2. If the company purchases the equipment by taking a loan, the total debt in the balance sheet will and the debt ratio will change to 3. If the company cases the equipment, the company's debt ratio wil because the lease is not capitalized. 4. In this case, the company's financial risk will be under a lease agreement as compared to the financial risk in purchasing the equipment by taking a loan. 5. However, the lease is capitained, the financial risk under the lease agreement will be as compared to the skin buying the equipment
