Leasing is often referred to as off-balance-sheet financing because of the way that the transaction is treated and reported in financial statements.

According to the FASB-issued Statement 13, which of the following statements is true?

The present value of all future lease payments should be reported as assets on the balance sheet.

Assets leased under financial or capital leases should be reported as fixed assets on the balance sheet.

The present value of all past lease payments should be reported as a liability on the balance sheet.

Leased assets should be reported as current assets on the balance sheet.

Consider the following statement on capital leases:

According to Statement 13, the payments on a financial lease should be treated as an operating expense and should not in any case affect a firms true debt ratio.

Is the preceding statement true or false?

True

False

To consider the financial statement effects of leasing versus purchasing an asset, review the following case of Sunny Company

Sunny Company needs equipment that will cost the company $200. Sunny Company is considering to either purchase the equipment by borrowing $200 from a local bank or leasing the equipment. Assume that the lease will be structured as an operating lease.

Some data from Sunny Companys current balance sheet prior to the lease or purchase of the equipment are:

Balance Sheet Data
(Dollars)
Current assets	$600	Debt	$500
Net fixed assets	400	Equity	500
Total assets	$1,000	Total claims	$1,000

1.	The companys current debt ratio is ------- .
2.	If the company purchases the equipment by taking a loan, the total debt in the balance sheet will DECREASE/INCREASE , and the debt ratio will change to------ .
3.	If the company leases the equipment, the companys debt ratio will DECREASE/INCREASE/UNCHANGED because the lease is not capitalized.
4.	In this case, the companys financial risk will be LESS/MORE under a lease agreement as compared to the financial risk in purchasing the equipment by taking a loan.
5.	However, if the lease is capitalized, the financial risk under the lease agreement will be MORE/SAME as compared to the risk in buying the equipment.