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.
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
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.
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
14.
Which of the following apply to the lessee of a sale and leaseback arrangement?
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
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
Refer to section 27.1
AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.1 Topic: Operating lease
16.
A financial lease:
I. is generally a fully amortized lease.
II. usually requires the lessee to insure the asset.
III. is generally cancelable without penalty if the lessee provides 30 days advance notice.
IV. is referred to as a capital lease by accountants.
A.
I and III only
B.
II and IV only
C.
I and II only
D.
II, III, and IV only
E.
I, II, and IV 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: Financial lease
17.
If a firm does not expect to owe taxes for a few years and needs some equipment, the firm should:
A.
lease the equipment and retain the tax benefits.
B.
lease the equipment with the lessor retaining the tax ownership of the asset.
C.
borrow the money to buy the asset and then depreciate it using MACRS depreciation.
D.
buy the equipment with cash and depreciate it using MACRS.
E.
buy the equipment and depreciate it straight-line over the life of the asset.
Refer to section 27.1
AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.1 Topic: Tax-oriented lease
18.
If a lessor borrows money on a nonrecourse basis to purchase an asset that will be leased to another party, then:
A.
the lessor is responsible for the payments on the borrowed funds whether or not the lessee pays the lease payments.
B.
the lessee must pay both the lease payment and the loan payment.
C.
the loan is considered paid in full if the lessee discontinues making the lease payments or terminates the lease early.
D.
the lessor is only obligated to make loan payments as long as the lessor is collecting the lease payments.
E.
the lessor must pursue the lessee if the lessee fails to make the agreed upon lease payments.
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
19.
If a firm enters a sale and leaseback agreement, then:
I. the lessee will benefit from an immediate cash inflow.
II. both the lessor and the lessee may benefit if the lessor can benefit more from the tax benefits of ownership than can the lessee.
III. the lease automatically becomes a nonrecourse lease.
IV. the lessee forfeits the right to repurchase the asset at a later date.
A.
I and III only
B.
II and IV only
C.
I and II only
D.
II and III only
E.
III and IV 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: Sale and leaseback
20.
An operating lease:
A.
is recorded at its net present value on the balance sheet.
B.
is recorded on the balance sheet as both an asset and a liability.
C.
is recorded at its estimated residual balance on the balance sheet.
D.
is reflected in the footnotes rather than on the balance sheet.
E.
does not appear either on a financial statement or in the footnotes.
Refer to section 27.2
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.2 Topic: Operating lease
21.
Which one of the following will classify a lease as a capital lease for accounting purposes?
A.
The lease transfers ownership of the asset to the lessee by the end of the lease.
B.
The lease term is 75 percent or less of the estimated economic life of the asset.
C.
The lessee can buy the asset at fair market value at the end of the lease.
D.
The initial present value of the lease payments equals or exceeds 80 percent of the fair market value of the asset.
E.
The total of the lease payments exceeds $100,000.
Refer to section 27.2
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.2 Topic: Capital lease
22.
A capital lease is recorded as an asset on the balance sheet in an amount equal to:
A.
the dollar amount of each lease payment multiplied by the total number of lease payments in the original agreement.
B.
the dollar amount of each lease payment multiplied by the number of lease payments remaining.
C.
the dollar amount of each lease payment multiplied by the number of lease payments per year.
D.
the lesser of the present value of the remaining lease payments or the cost of the asset.
E.
the future value of the lease agreement at the time the agreement was made.
Refer to section 27.2
AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.2 Topic: Capital lease
23.
Which one of the following correctly states one of the conditions established by the IRS for a lease to be considered valid for tax purposes?
A.
The lease should have high payments at the beginning of the lease period and low payments at the end of the lease period.
B.
Any renewal option should be based on a value which is less than the fair market value of the asset at the time of renewal.
