Chapter 27: Leasing — Multiple Choice Questions

Ron leases a car from Uptown Motors and pays $225 a month as a lease payment. Which one of the following terms applies to Ron?

• lessee

• lessor

• guarantor

• trustee

• manager

The party who owns a leased asset is called the:

• lessee

• lessor

• guarantor

• trustee

• manager

Kate is leasing some equipment from Ajax Leasing for a period of one-year. Ajax pays the maintenance, taxes, and insurance costs for this equipment. The life of the equipment is 7 years. Which type of lease does Kate have?

• open

• straight

• operating

• financial

• tax-oriented

Alfredo has a non-cancelable, five year lease on an industrial-grade sewing machine for stitching upholstery. For accounting purposes, this is considered to be a capital lease. The life of the sewing machine is five years. Alfredo must pay all taxes and insurances related to this lease. Which type of lease does Alfredo have on this sewing machine?

• open

• straight

• operating

• financial

• tax-oriented

A financial lease in which the lessor is the owner for tax purposes is called a(n) _____ lease.

• open

• straight

• operating

• tax-oriented

• tax-exempt

Heavy Equipment Rentals borrows money on a nonrecourse basis from The Financial Group to fund its purchases of construction equipment such as backhoes, graders, earth movers, etc. This equipment is then leased to contractors. The leases are classified as tax-oriented leases. Which one of the following terms best describes these lease of construction equipment?

• leveraged lease

• sale and leaseback arrangement

• operating lease

• perpetual lease

• straight lease

Brentwood Industries is selling its tool and die equipment to Upward Financial and then leasing that equipment from Upward for a period of ten years, which is the useful remaining life of the equipment. Which type of lease arrangement is this?

• leveraged lease

• sale and leaseback

• operating lease

• tax-oriented lease

• straight lease

You are comparing a lease to a purchase. The NPV associated with this analysis is referred to as the:

• open interest net present value

• depreciated net present value

• net advantage to leasing

• profitability index

• net value of purchasing

Which one of the following statements is correct concerning the lease versus buy decision?

• The lessor is primarily concerned with returning the asset at the end of the lease term without incurring any additional charges.

• The lessor is primarily concerned about the use of the asset.

• If Dell Computer became a lessor of its own computers it would be engaging in direct leasing.

• A firm should always purchase, rather than lease, any asset that has a projected positive salvage value at the end of the relevant period of use.

• Lessors provide a source of financing for lessees.

In a direct lease, the lessor: I. is the end user of the asset. II. rents the leased asset from the manufacturer. III. owns the asset. IV. is generally an independent leasing company.

• II and III only

• I and IV only

• III and IV only

• II, III, and IV only

• I, II, III, and IV