Lesson 13

Question 1

What is a lease?

Answer 1

A contractual agreement that gives the lessee the right to use specific property (owned by the lessor) for a specified period of time.

Question 2

What are some advantages of leasing?

Answer 2

1. 100% financing at fixed rates
2. Protection against obsolescence
3. Flexibility
4. Less costly financing

Question 3

What are the 3 common categories of lessors?

Answer 3

1. Banks
2. Captive leasing companies
3. Independents

Question 4

What is captive leasing companies?

Answer 4

They are subsidiaries whose primary business is to perform leasing operations for the parent company.

Question 5

What is a finance lease?

Answer 5

The lessee recognizes interest expense on the lease liability over the life of the lease using the effective interest method and records amortization expense on the right of use asset generally on a straight line basis.

Question 6

What is an operating lease?

Answer 6

The lessee measures interest expense using the effective interest method and amortizes the right of use asset such that the total reported lease expense is the same from period to period.

Question 7

What is the transfer of ownership test?

Answer 7

If the lease transfers ownership of the asset to the lessee, it is a finance lease.

Question 8

What is residual value?

Answer 8

It is the expected value of the leased asset at the end of the lease term. It can be guaranteed or unguaranteed?

Question 9

What is a guaranteed residual value?

Answer 9

The lessee has an obligation to not only return the leased asset at the end of the lease term but also to guarantee that the residual value will be a certain amount.

Question 10

What is an unguaranteed residual value?

Answer 10

The lessee does not have any obligation to the lessor at the end of the lease, expect to return the leased asset to the lessor.

Question 11

Finance Lease Criteria

Answer 11

Question 12

What single lease expense is recognized on the income statement?

Answer 12

An operating lease

Question 13

What is a major reason why a company may become involved in leasing to other companies?

Answer 13

Tax incentives

Question 14

In computing the present value of the lease payments, what rate should the lessee use?

Answer 14

use the implicit rate of the lessor, assuming that the implicit rate is known to the lessee

Question 15

Which of the following is an advantage of captive leasing companies over the other players in the leasing market?

Answer 15

They have the point-of-sale advantage in finding leasing customers.

Question 16

Which of the following best describes current practice in accounting for leases?

Answer 16

All long-term leases are capitalized.