Multiple Choice Questions



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Chapter 27

Leasing


 


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



 

2.

The party who owns a leased asset is called the: 
 



A. 

lessee.




B. 

lessor.




C. 

guarantor.




D. 

trustee.




E. 

manager.



 

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



 

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



 

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



 

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



 

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



 

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.



 

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.



 

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. 
 



A. 

II and III only




B. 

I and IV only




C. 

III and IV only




D. 

II, III, and IV only




E. 

I, II, III, and IV



 

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



 

12.

A financial lease: 
 



A. 

is generally called a capital lease by accountants.




B. 

requires the lessor to maintain the asset.




C. 

is a partially amortized lease.




D. 

is often called a single net lease.




E. 

can generally be cancelled without penalty.



 

13.

A leveraged lease is a: 
 



A. 

lease where the lessee is the owner of the asset for tax purposes.




B. 

sale and leaseback arrangement.




C. 

type of operating lease.




D. 

lease paid with money borrowed by the lessee.




E. 

lease where the lessor borrows on a nonrecourse basis.



 

14.

Which of the following apply to the lessee of a sale and leaseback arrangement?

I. may have option to purchase asset at end of lease term


II. receives cash from the sale of the asset
III. maintains ownership rights
IV. uses the asset 
 



A. 

I and IV only




B. 

II and III only




C. 

I, II, and IV only




D. 

II, III, and IV only




E. 

I, II, III, and IV



 

15.

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



A. 

operating




B. 

tax-oriented




C. 

sale and buyback




D. 

leveraged




E. 

financial



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