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
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.
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