Question

Use the following statements to answer this question: I. An increase in the interest rate of...

Use the following statements to answer this question:
I. An increase in the interest rate of the lease would decrease the PV of rental revenue for an operating lease.
II. An increase in interest rates would decrease the value of assets from the financial lease on the lessor’s balance sheet.

I and II are correct.

I and II are incorrect.

I is correct and II is incorrect.

I is incorrect and II is correct.
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Answer #1

In case of finance lease,Lessee record the assets at lower of the fair value of the asset or present value of minimum lease payment,discounted at the interest rate implicit in the lease .

Higher interest rate result in lower present value,thus an increase in interest rates would decrease the value of assets from the financial lease on the lessor’s balance sheet.

An increase in the interest rate of the lease would decrease the PV of rental revenue for an operating lease.Since higher interest rate decrease the present value.

Hence both the given statement are true.Accordingly,correct answer is Option-I and II are correct.

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