Question

2. Which of the following lease contract would be the most likely be classified as a finance lease by the lessee? a. The lease term is 7 years and economic life of the lease asset is 8 years b. The fair value of the lease asset is $20 million, and the present value of the lease payments is $13 million c. Ownership of the leased assets reverts to the lessor at the end of the lease term d. The lessee has the option of acquiring the asset during or at the end of the lease term at a price of fair value plus 20% 3. Of the following temporary differences, which one ordinarily creates a deferred tax asset? a. Installment sale for tax reporting b. Prepaid expense C. Fines paid for violation of law d. Estimated warranty expense 4. Which of the following statement about finance lease and operating lease for a lessee is False? a. Operating lease has the same amount of yearly expenses over the life of the lease while finance lease has more expense in the early life of the lease. b. Whether it is a finance lease or an operating lease, lessee has to record right-of- use asset and lease liability. c. Under the finance lease, lease liability is considered as non-debt liability, i.e.., they are excluded from calculating debt to equity ratio. d. The amount of total expenses over the life the lease is the same comparing finance lease with operating lease. 5. Banana company's defined pension plan had a PBO of $500 million on January 1, 2018. During 2019, pension benefits paid were $50 million. The discount rate for the plan for this year is 6%. Service cost for 2019 was $54 million. Plan assets (fair value) increase during the year was $60 million. In 2019 gain due changes in actuarial assumption has $14 million. The amount of the PBO at December 31, 2019 was: a. $508 Million b 520 million

Answer 1

A finance lease is a type of lease in which a finance company (bank) is typically the legal owner of the asset for the duration of the lease, while the lessee has operating control over the asset.

More specifically, it is a commercial arrangement where:

• the lessee (customer or borrower) will select an asset (equipment, software);
• the lessor (finance company) will purchase that asset;
• the lessee will use that asset during the lease;
• the lessee will pay a series of installments for the use of that asset;
• the lessor will recover a large part or all of the cost of the asset plus earn interest from the installment paid by the lessee;
• the lessee has the option to acquire ownership of the asset.
• (e.g. paying the last rental, or bargain option purchase price)

In the light of above explanation answer of following questions is as follows-

2. (d) lessee has the option to acquire ownership of the asset during or at the end of the lease term at a price of fair value plus 20%.

3. A deferred tax asset is an asset on a company's balance sheet that may be used to reduce its taxable income.

example

business has overpaid taxes or taxes paid in advance on its balance sheet.

answer (b)

4.    (c) under the financial lease ,lease liability is considered as non debt liability i.e excluded from calculation of debt to equity ratio .

(question 5 is not complete)