Question

1.

From the lessor's standpoint, which of the following statements regarding leasing is false?

a. For sales-type lease agreements, the lessor earns interest in addition to profit from the transfer of the asset.

b. The asset is transferred to the lessee and removed from the books of the lessor.

c. The lease provides a method of indirectly making a sale.

d. The risk of default is a disadvantage for the lessor.

2. Which is an advantage of leasing from a lessee's viewpoint?

a. The lease is a way of indirectly making a sale.

b. "Off-balance-sheet financing" may be practiced.

c. Assets and liabilities associated with the lease may not be reported.

d. The asset can be acquired without having to make a substantial down payment.

3. Control over the underlying asset in a lease means directing its use and obtaining substantially all economic benefit.

True

False

4. Risks and benefits of ownership transfer to the lessee with an operating lease.

True

False

Answer 1

Part 1

Option B

b. The asset is transferred to the lessee and removed from the books of the lessor.

(a method of indirectly making a sale, to earn profit on the transfer of an asset over the term of the lease and disadvantage of default risk are associated with the leasing from the lessor’s viewpoint).

Part 2

Option B

b. "Off-balance-sheet financing" may be practiced.

(It is an advantage to the lessee whereby a lessee does not include a lease liability on the balance sheet.)

Part 3

True

The lessee is said to have the right to control the use of an identified asset if he has right to direct the use of the identified asset and right to obtain substantially all of the economic benefits throughout the period of use.

Part 4

True

In operating lease, both risks and benefits ownership transfer to the lessee.