5 leasing allows the lessee in effect to depreciate

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Unformatted text preview: allows the lessee, in effect, to depreciate land, which is prohibited if the land were purchased. Because the lessee who leases land is permitted to deduct the total lease payment as an expense for tax purposes, the effect is the same as though the firm had purchased the land and then depreciated it. 6. Because it results in the receipt of service from an asset possibly without increasing the assets or liabilities on the firm’s balance sheet, leasing may result in misleading financial ratios. Understating assets and liabilities can cause certain ratios, such as the total asset turnover, to look better than they might be. With the passage of FASB No. 13, this advantage no longer applies to financial leases, although in the case of operating leases, it remains a potential advantage. 7. Leasing provides 100 percent financing. Most loan agreements for the purchase of fixed assets require the borrower to pay a portion of the purchase price as a down payment. As a result, the borrower is able to borrow only 90 to 95 percent of the purchase price of the asset. 8. When...
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