Question 1

In a direct lease, the:

Accepted Answer

In a direct lease, the lessor is typically an independent leasing company that owns the asset and leases it to the lessee.

Question 2

Ron leases a car from Uptown Motors and pays $225 a month as a lease payment. Which one of the following terms applies to Uptown Motors?

Accepted Answer

Uptown Motors is the lessor in this situation because they are the ones who own and lease out the car to Ron. Lessee refers to the person who is leasing the car (in this case, Ron). Guarantor, trustee, and manager do not apply to this scenario.

Question 3

Ajax Rentals borrows money to purchase equipment which it then leases to customers. Ajax must pay its loan payments on this equipment even if the lessees fail to pay their lease payments. Which one of the following terms best describes one of these leases?

Accepted Answer

A single-investor lease typically involves a lessor (in this case, Ajax Rentals) purchasing equipment with borrowed funds and then leasing it out. The lessor is responsible for the loan repayments, regardless of the lessee's payment performance, which matches the scenario described.

Question 4

The party who uses a leased asset is called the:

Accepted Answer

The lessee is the party who uses or leases an asset from the lessor. The lessor is the one who owns the asset and leases it out. The guarantor is someone who promises to pay off a debt or a lease in case the lessee defaults, while a trustee manages assets on behalf of others. Therefore, the correct answer is A) Lessee.

Question 5

Equipment Rentals borrows money on a nonrecourse basis to fund its purchases of construction equipment. This equipment is then leased to contractors. The leases are classified as tax-oriented leases. Which one of the following terms best describes one of these leases?

Accepted Answer

Tax-oriented leases are typically structured as leveraged leases, which involves the use of debt financing to acquire the equipment. The lessor (in this case, Equipment Rentals) places a down payment and borrows the rest of the purchase price from a lender, and then leases the equipment to the lessee (the contractor). The lease payments from the lessee are used to repay the loan, and the lessor earns a profit from the difference between the lease payments and the loan payments. This type of lease is popular because it offers tax benefits to both the lessor and the lessee.

Question 6

An operating lease has which one of the following characteristics?

Accepted Answer

An operating lease allows the lessee to cancel the lease prior to the expiration date, unlike a financial lease where the lessee is responsible for the entire lease term. The other characteristics listed (A, B, C, and E) are associated with a financial lease.

Question 7

Kate is leasing some equipment from Ajax Leasing for a period of one year. Ajax pays the maintenance, taxes, and insurance costs for this equipment. The life of the equipment is seven years. Which type of lease does Kate have?

Accepted Answer

Kate has an operating lease as Ajax Leasing owns the equipment and is responsible for maintenance, taxes, and insurance costs. This type of lease is commonly used for short-term leases and allows the lessee to use the equipment without taking on the risks associated with ownership.

Question 8

Maria has a fully amortized 10-year lease on an industrial-grade sewing machine which requires her to pay all taxes, maintenance costs, and insurance premiums related to this lease. Which type of lease is this?

Accepted Answer

This is a financial lease, also known as a capital lease, where the lessee is responsible for all expenses associated with the asset, including taxes, maintenance, and insurance.

Question 9

Which one of the following does not apply to the lessee of a sale and leaseback arrangement?

Accepted Answer

In a sale and leaseback arrangement, the lessee sells the asset and then leases it back. Therefore, they receive cash from the sale upfront, not in the form of lease payments. Lease payments are made by the lessee to the lessor for the use of the asset.

Question 10

If a lessor borrows money from a lender on a nonrecourse basis to purchase an asset that will be leased to another party, then the:

Accepted Answer

When a lessor borrows money on a nonrecourse basis, the lender does not have the right to pursue the lessor personally in case the lessee fails to make the lease payments. The lender only has a claim on the leased assets, and the lessor is only obligated to make loan payments as long as they are collecting lease payments. Therefore, the correct choice is D.

Question 11

Brentwood Industries is selling its tool and die equipment to Upward Financial and then leasing that equipment from Upward for a period of 10 years, which is the useful remaining life of the equipment. Which type of lease arrangement is this?

Accepted Answer

This is a sale and leaseback arrangement where Brentwood Industries is selling its equipment to Upward Financial and then leasing it back for a period of 10 years. This allows Brentwood to free up cash by selling the equipment and then continue to use it by leasing it back.

Question 12

If a firm does not expect to owe taxes for a few years and needs some equipment, the firm generally should:

Accepted Answer

If a firm does not expect to owe taxes for a few years, leasing the equipment with the lessor retaining the tax ownership of the asset is generally more advantageous. This way, the lessor can utilize the tax benefits immediately, such as depreciation, and often pass these savings to the lessee in the form of lower lease payments. Since the firm won't benefit from tax deductions due to depreciation (as it doesn't expect to owe taxes), retaining tax ownership doesn't provide an advantage to them.

Question 13

A financial lease in which the lessor is the owner for tax purposes is called a(n) ________ lease.

Accepted Answer

A financial lease in which the lessor is the owner for tax purposes is called a tax-oriented lease. In this type of lease, the lessor receives tax benefits, such as depreciation deductions, by retaining ownership of the leased asset.

Question 14

Which one of the following statements is correct?

Accepted Answer

Lessors provide a source of financing for lessees. They provide funding for the asset, which allows the lessee to use it for a specified period of time. This can be beneficial for the lessee, as they may not have the funds to purchase the asset outright or may not want to tie up their capital in one particular asset. Additionally, leasing can provide tax advantages for the lessee. The lessor, in turn, earns income from the lease payments and may also be able to take advantage of certain tax benefits.

Question 15

Beginning in 2019, operating leases will be recorded:

Accepted Answer

Beginning in 2019, operating leases must be recorded as a right-of-use asset and a corresponding liability on the balance sheet of the lessee under the new accounting standards ASC 842. This change is made to reflect the lessee's obligation to make lease payments over the lease term.

Question 16

A financial lease:

Accepted Answer

A financial lease typically does not require the lessor to maintain the asset (eliminating A), is non-cancelable (eliminating B), is fully amortized over the lease term rather than partially (eliminating C), and is usually long-term rather than short-term (eliminating D). It can be classified as a tax-oriented lease if it meets certain criteria related to ownership, tax benefits, and risk assumption, making E the correct choice.

Question 17

If a firm enters a sale and leaseback agreement, then:

Accepted Answer

In a sale and leaseback agreement, the seller (lessee) receives immediate cash from the sale and continues to use the asset, while the buyer (lessor) gains a steady income stream from leasing the asset back.

Question 18

A leveraged lease is a:

Accepted Answer

A leveraged lease is a type of lease where the lessor borrows funds from a third-party lender on a nonrecourse basis to finance the acquisition of the leased asset. The principal and interest payments on the borrowing are covered by the lease payments made by the lessee. The lessor typically has no recourse to the lessee beyond the lease payments for the repayment of the financing arrangement.

Question 19

A firm that is cyclical in nature and requires extra equipment only during its peak periods should consider leasing that extra equipment using a(n) ________ lease.

Accepted Answer

An operating lease is the best choice for a firm that only requires extra equipment during peak periods because it is a short-term lease that provides the lessee with the benefits of the equipment without the costs of ownership, and the lessor retains ownership and responsibility for maintenance and repairs. This allows the firm to quickly and easily acquire the equipment they need for a limited amount of time, without committing to a long-term investment.

Question 20

A financial lease:

Accepted Answer

A financial lease is another term for a capital lease. It is a type of lease in which the lessee obtains almost all of the benefits and risks of ownership of the leased asset. The lessor is not responsible for maintenance of the asset in a financial lease. Financial leases can be fully or partially amortized, but they cannot be canceled without penalty once the lease has started.

Quiz 27: Leasing

In a direct lease, the:

Ron leases a car from Uptown Motors and pays $225 a month as a lease payment. Which one of the following terms applies to Uptown Motors?

Ajax Rentals borrows money to purchase equipment which it then leases to customers. Ajax must pay its loan payments on this equipment even if the lessees fail to pay their lease payments. Which one of the following terms best describes one of these leases?

The party who uses a leased asset is called the:

Equipment Rentals borrows money on a nonrecourse basis to fund its purchases of construction equipment. This equipment is then leased to contractors. The leases are classified as tax-oriented leases. Which one of the following terms best describes one of these leases?

An operating lease has which one of the following characteristics?

Kate is leasing some equipment from Ajax Leasing for a period of one year. Ajax pays the maintenance, taxes, and insurance costs for this equipment. The life of the equipment is seven years. Which type of lease does Kate have?

Maria has a fully amortized 10-year lease on an industrial-grade sewing machine which requires her to pay all taxes, maintenance costs, and insurance premiums related to this lease. Which type of lease is this?

Which one of the following does not apply to the lessee of a sale and leaseback arrangement?

If a lessor borrows money from a lender on a nonrecourse basis to purchase an asset that will be leased to another party, then the:

Brentwood Industries is selling its tool and die equipment to Upward Financial and then leasing that equipment from Upward for a period of 10 years, which is the useful remaining life of the equipment. Which type of lease arrangement is this?

If a firm does not expect to owe taxes for a few years and needs some equipment, the firm generally should:

A financial lease in which the lessor is the owner for tax purposes is called a(n) ________ lease.

Which one of the following statements is correct?

Beginning in 2019, operating leases will be recorded:

A financial lease:

If a firm enters a sale and leaseback agreement, then:

A leveraged lease is a:

A firm that is cyclical in nature and requires extra equipment only during its peak periods should consider leasing that extra equipment using a(n) ________ lease.

A financial lease: