ACCT Ch.12

Question 1

___ conveys the right to use an asset

Answer 1

Lessor

Question 2

___ party that uses the asset

Answer 2

Lessee

Question 3

___ the asset’s expected value at the end of the lease

Answer 3

residual value

Question 4

___ the longer the term of the lease, the more the asset is used up by the lessee

Answer 4

duration of the lease

Question 5

in a ___, assets remain on the lessor’s BS

-asset and liability is not not the lessee’s BS

Answer 5

operating lease

Question 6

in a ___, the lessor takes assets off the BS

-lessee adds the asset and liability to the BS

Answer 6

capital lease

Question 7

___ lessee is not obligated to make payments until the lessor preforms the duties specified in the contract

Answer 7

executory contract

Question 8

What type of lease do Lessees prefer?

Answer 8

operating lease

Question 9

What are 5 reasons why lessees prefer operating leases?

Answer 9

• 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

Question 10

What are 3 reasons why leasing is useful to managers?

Answer 10

• assets without cash outlets
• protected against obsolete technologies
• tax incentives

Question 11

the SEC wanted to see more leases as___

Answer 11

capital leases

Question 12

___ are used when property rights in the asset have not been transferred to the lessee

Answer 12

operating lease

Question 13

___ are used then property rights in the asset have been transferred to the lessee

Answer 13

capital lease

Question 14

In an operating lease, the leased asset is on the ____ book

Answer 14

lessors book

Question 15

In a capital lease, the leased asset is treated as ___ then___

Answer 15

being sold and then removed from the lessor’s book

Question 16

In a ___ the lessee puts both the leased asset and the liability for future payments on its book

Answer 16

capital lease

Question 17

In a ___ no asset or liability appears on the lessee’s book because the lease is considered to be an unperformed contract

Answer 17

operating lease

Question 18

___ lessee is in essence financing the use of the asset without recognized liability

Answer 18

off balance sheet accounting

Question 19

What is the criteria for a capital lease?

Answer 19

• 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

Question 20

___ the lease payments equal or exceeds 90% of the value of the asset

Answer 20

recovery of investment criteria

Question 21

___ the lessee has the option, but not the obligation, to purchase the asset at a reduced cost

Answer 21

bargin purchase option

Question 22

What is the criteria for an operating lease?

Answer 22

• property rights are not transferred

- lease is expensed in the periods used

Question 23

___ the lessee guarantees that the leased asset will have a certain value at the end of the lease

Answer 23

guaranteed residual value

Question 24

___ cost of keeping up with the asset.

-repairs, maintenance, taxes, insurance, etc…

Answer 24

executory cost

Question 25

___ occurs when one company sells an asset to another company and immediately leases it back

Answer 25

sale and lease back

Question 26

Why would someone perform a sale and lease back?

Answer 26

• a way to finance asset acquisition

- for tax reasons

Question 27

Operating lease and capital lease pay the same amount, but ___ will be higher in earlier years and lower rater in later years

Answer 27

capital lease

Question 28

What are the capital lease effects on ratios?

Answer 28

• current ratios will be lower
• leverage ratios will be lower
• asset turnover ratios will be lower

Question 29

Lessors prefer ___

Answer 29

capital leases

Question 30

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?

Answer 30

• 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

Question 31

What are the two types of leases that lessors use?

Answer 31

• sales type lease

- direct financing lease

Question 32

___exists when the lessor is a manufacturer or dealer

Answer 32

sales type lease

Question 33

___exists when the lessor is a financial institution

Answer 33

direct financing lease

Question 34

Lessors who are not manufacturers or dealers earn their profit from ___

Answer 34

the finance fee they charge the lessee for financing the asset acquisition

Question 35

For manufactures or dealers, leases can serve as a ___

Answer 35

marketing vehicle

Question 36

A lessor who uses leasing as a means for marketing products earns a profit from what 2 sources?

Answer 36

• manufacturer’s pr dealer’s profit

- financing profit

Question 37

___ the difference between faire value and its cost to sell

Answer 37

manufacturer’s or dealer’s profit

Question 38

___ the difference between lease payments plus un-guaranteed residual value and the fair value of the leased asset

Answer 38

financing profit