ACCT Ch.12 Flashcards
___ conveys the right to use an asset
Lessor
___ party that uses the asset
Lessee
___ the asset’s expected value at the end of the lease
residual value
___ the longer the term of the lease, the more the asset is used up by the lessee
duration of the lease
in a ___, assets remain on the lessor’s BS
-asset and liability is not not the lessee’s BS
operating lease
in a ___, the lessor takes assets off the BS
-lessee adds the asset and liability to the BS
capital lease
___ lessee is not obligated to make payments until the lessor preforms the duties specified in the contract
executory contract
What type of lease do Lessees prefer?
operating lease
What are 5 reasons why lessees prefer operating leases?
- no future liability
- off balance sheet financing
- no effect on BS ratios that impact lending covenants
- leaves open opportunities for future borrowing
- keeping assets off BS improves mgmt performance ratios
What are 3 reasons why leasing is useful to managers?
- assets without cash outlets
- protected against obsolete technologies
- tax incentives
the SEC wanted to see more leases as___
capital leases
___ are used when property rights in the asset have not been transferred to the lessee
operating lease
___ are used then property rights in the asset have been transferred to the lessee
capital lease
In an operating lease, the leased asset is on the ____ book
lessors book
In a capital lease, the leased asset is treated as ___ then___
being sold and then removed from the lessor’s book
In a ___ the lessee puts both the leased asset and the liability for future payments on its book
capital lease
In a ___ no asset or liability appears on the lessee’s book because the lease is considered to be an unperformed contract
operating lease
___ lessee is in essence financing the use of the asset without recognized liability
off balance sheet accounting
What is the criteria for a capital lease?
- transfers ownership of the asset to the lessee by the end of the lease term
- contains a bargin purchase option
- the lease term is 75% more of the life of the asset
- the lease payment equals or exceeds 90% of the value of the asset
___ the lease payments equal or exceeds 90% of the value of the asset
recovery of investment criteria
___ the lessee has the option, but not the obligation, to purchase the asset at a reduced cost
bargin purchase option
What is the criteria for an operating lease?
- property rights are not transferred
- lease is expensed in the periods used
___ the lessee guarantees that the leased asset will have a certain value at the end of the lease
guaranteed residual value
___ cost of keeping up with the asset.
-repairs, maintenance, taxes, insurance, etc…
executory cost
___ occurs when one company sells an asset to another company and immediately leases it back
sale and lease back
Why would someone perform a sale and lease back?
- a way to finance asset acquisition
- for tax reasons
Operating lease and capital lease pay the same amount, but ___ will be higher in earlier years and lower rater in later years
capital lease
What are the capital lease effects on ratios?
- current ratios will be lower
- leverage ratios will be lower
- asset turnover ratios will be lower
Lessors prefer ___
capital leases
What needs to happen for a lessor to treat the lease as a capital lease and consider the asset as sold and removed from the lessors book?
- transfer property rights and the leased asset to the lessee
- allow accurate estimates regarding the amount and collectability of the cash flow to the lessor
What are the two types of leases that lessors use?
- sales type lease
- direct financing lease
___exists when the lessor is a manufacturer or dealer
sales type lease
___exists when the lessor is a financial institution
direct financing lease
Lessors who are not manufacturers or dealers earn their profit from ___
the finance fee they charge the lessee for financing the asset acquisition
For manufactures or dealers, leases can serve as a ___
marketing vehicle
A lessor who uses leasing as a means for marketing products earns a profit from what 2 sources?
- manufacturer’s pr dealer’s profit
- financing profit
___ the difference between faire value and its cost to sell
manufacturer’s or dealer’s profit
___ the difference between lease payments plus un-guaranteed residual value and the fair value of the leased asset
financing profit
