Explain the differences between purchasing an asset and leasing an asset.
70.
What are some "good" reasons for opting to lease rather than purchase an asset?
71.
Explain the "leasing paradox" and also explain why leasing is or is not a "zero sum game".
72.
Why might a firm opt to sell and leaseback an asset which it currently owns?
Chapter 27 Leasing Answer Key
Multiple Choice Questions
1.
Ron leases a car from Uptown Motors and pays $225 a month as a lease payment. Which one of the following terms applies to Ron?
A.
lessee
B.
lessor
C.
guarantor
D.
trustee
E.
manager
Refer to section 27.1
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.1 Topic: Lessee
2.
The party who owns a leased asset is called the:
A.
lessee.
B.
lessor.
C.
guarantor.
D.
trustee.
E.
manager.
Refer to section 27.1
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.1 Topic: Lessor
3.
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 7 years. Which type of lease does Kate have?
A.
open
B.
straight
C.
operating
D.
financial
E.
tax-oriented
Refer to section 27.1
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.1 Topic: Operating lease
4.
Alfredo has a non-cancelable, five year lease on an industrial-grade sewing machine for stitching upholstery. For accounting purposes, this is considered to be a capital lease. The life of the sewing machine is five years. Alfredo must pay all taxes and insurances related to this lease. Which type of lease does Alfredo have on this sewing machine?
A.
open
B.
straight
C.
operating
D.
financial
E.
tax-oriented
Refer to section 27.1
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.1 Topic: Financial lease
5.
A financial lease in which the lessor is the owner for tax purposes is called a(n) _____ lease.
A.
open
B.
straight
C.
operating
D.
tax-oriented
E.
tax-exempt
Refer to section 27.1
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.1 Topic: Tax-oriented lease
6.
Heavy Equipment Rentals borrows money on a nonrecourse basis from The Financial Group to fund its purchases of construction equipment such as backhoes, graders, earth movers, etc. This equipment is then leased to contractors. The leases are classified as tax-oriented leases. Which one of the following terms best describes these lease of construction equipment?
A.
leveraged lease
B.
sale and leaseback arrangement
C.
operating lease
D.
perpetual lease
E.
straight lease
Refer to section 27.1
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.1 Topic: Leveraged lease
7.
Brentwood Industries is selling its tool and die equipment to Upward Financial and then leasing that equipment from Upward for a period of ten years, which is the useful remaining life of the equipment. Which type of lease arrangement is this?
A.
leveraged lease
B.
sale and leaseback
C.
operating lease
D.
tax-oriented lease
E.
straight lease
Refer to section 27.1
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.1 Topic: Sale and leaseback
8.
You are comparing a lease to a purchase. The NPV associated with this analysis is referred to as the:
A.
open interest net present value.
B.
depreciated net present value.
C.
net advantage to leasing.
D.
profitability index.
E.
net value of purchasing.
Refer to section 27.5
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-03 How to calculate the net advantage of leasing and related issues. Section: 27.5 Topic: Net advantage to leasing
9.
Which one of the following statements is correct concerning the lease versus buy decision?
A.
The lessor is primarily concerned with returning the asset at the end of the lease term without incurring any additional charges.
B.
The lessor is primarily concerned about the use of the asset.
C.
If Dell Computer became a lessor of its own computers it would be engaging in direct leasing.
D.
A firm should always purchase, rather than lease, any asset that has a projected positive salvage value at the end of the relevant period of use.
E.
Lessors provide a source of financing for lessees.
Refer to section 27.1
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.1 Topic: Leasing versus buying
10.
In a direct lease, the lessor:
I. is the end user of the asset.
II. rents the leased asset from the manufacturer.
III. owns the asset.
IV. is generally an independent leasing company.
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.1 Topic: Direct lease
11.
An operating lease has which of the following characteristics?
I. lessee has responsibility for the maintenance and insurance
II. lease payments cover the full cost of the asset
III. economic life of the asset exceeds the lease term
IV. lessee can cancel the lease prior to the expiration date
A.
I and III only
B.
II and IV only
C.
I and II only
D.
III and IV only
E.
I, II, and III only
Refer to section 27.1
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.1 Topic: Operating lease
