1. In a "Financial Lease", the risk and rewards of ownership are essentially transferred to the:
Lessor (Owner)
Insurance Company
Lessee (User)
Manufacturer
Explanation:
A Financial Lease is a long-term lease where the lessee bears the risks (maintenance, obsolescence) and enjoys the rewards of the asset, almost like ownership, though legal title remains with the lessor.
2. The key difference between "Leasing" and "Hire Purchase" is that in Hire Purchase:
The hirer cannot claim depreciation.
Ownership is transferred to the hirer immediately upon signing the contract.
Ownership is transferred to the hirer only after the payment of the last installment.
The asset must be returned at the end of the term.
Explanation:
In Hire Purchase, the hirer has the option to purchase the asset at the end of the term. Ownership passes only when the final installment is paid. In Lease, ownership typically remains with the lessor.
3. An "Operating Lease" is usually characterized by:
Short-term duration, cancellable, lessor bears maintenance.
Long-term duration, non-cancellable, lessee bears maintenance.
Ownership transfer at the end.
Full payout of asset cost.
Explanation:
An Operating Lease is like a rental agreement (e.g., renting a car for a week). It is short-term, doesn't cover the full asset cost, and the lessor handles maintenance. Financial Lease is the opposite.
4. In a lease agreement, the term "Residual Value" refers to:
The estimated value of the asset at the end of the lease term.
The interest component of the lease.
The monthly rent paid.
The initial cost of the asset.
Explanation:
Residual value is the expected fair market value of the leased asset at the conclusion of the lease period. In a financial lease, the lessee often guarantees this value.
5. Under Accounting Standard 19 (AS-19), a lease is classified as a "Finance Lease" if:
The lease term covers the major part of the economic life of the asset.
The lessor retains all risks and rewards.
The lease is for a short period.
The asset is specialized and can be easily used by others.
Explanation:
AS-19 criteria for Finance Lease include: transfer of ownership, option to purchase at bargain price, lease term covering major economic life, and PV of MLP essentially equaling fair value.
6. A "Leveraged Lease" involves three parties: the Lessee, the Lessor, and the:
Insurance Agent.
Manufacturer.
Lender (providing debt to the Lessor).
Government.
Explanation:
In a Leveraged Lease, the lessor borrows a large portion of the asset cost from a lender (non-recourse debt). The lessor provides only a small equity portion but enjoys tax benefits of ownership.
7. Which of the following is a characteristic of a "Financial Lease"?
The lease period covers substantially the entire economic life of the asset.
The lease is cancellable by the lessee at short notice.
The lessor bears the cost of maintenance and repairs.
The asset is returned to the lessor after a short period of use.
Explanation:
A Financial Lease is a non-cancellable contractual commitment where the lessee uses the asset for most of its economic life, bearing all risks and rewards, effectively acting like the owner.
8. In a lease, if the asset becomes obsolete due to technological changes before the end of the lease term, this risk is known as:
Interest Rate Risk
Liquidity Risk
Credit Risk
Obsolescence Risk
Explanation:
Obsolescence risk is the risk that the asset loses value faster than expected due to new technology or market changes. In an Operating Lease, this risk remains with the Lessor; in a Finance Lease, it is transferred to the Lessee.
9. In a Hire Purchase agreement, when does the "Legal Ownership" (Title) of the asset pass to the hirer?
On signing the agreement.
Only upon payment of the last installment.
Ownership never passes to the hirer.
On payment of the first installment.
Explanation:
In Hire Purchase, the hirer is a bailee of the goods until the final installment is paid. The option to purchase is exercised only at the very end.
10. A "Sale and Leaseback" arrangement is primarily used by companies to:
Close down operations.
Avoid tax completely.
Acquire new assets.
Unlock liquidity tied up in existing fixed assets while retaining their use.
Explanation:
In this arrangement, the owner sells an asset to a lessor and immediately leases it back. This frees up cash (capital) from the asset for working capital needs, without losing possession.
11. For a "Financial Lease", how is the asset treated in the books of the Lessee (User)?
It is shown as an asset, but depreciation is claimed by the Lessor.
It is shown as an asset on the Balance Sheet, and depreciation is claimed.
It is not recorded at all.
It is treated as an off-balance sheet item; only lease rentals are expensed.
Explanation:
Since a Financial Lease transfers substantially all risks and rewards to the lessee, accounting standards require the lessee to capitalize the asset (show it on the Balance Sheet) and claim depreciation, even though legal title is with the lessor.
12. In a typical Lease agreement, the legal ownership of the asset remains with:
The Lessee
The Manufacturer
The Lessor
The Bank
Explanation:
Throughout the lease term, the Lessor (the entity leasing out the asset) retains the legal title/ownership. The Lessee only gets the right to use the asset.
13. Who claims the "Depreciation" benefit for tax purposes in an Operating Lease?
The Lessor
The Lessee
The Manufacturer of the asset
Both Lessee and Lessor equally
Explanation:
In an Operating Lease, the risks and rewards of ownership remain with the Lessor. Therefore, the Lessor retains the asset on their books and claims depreciation as a tax deduction. The Lessee claims the lease rental as an expense.
14. A "Wet Lease" typically refers to a lease arrangement (often in aviation) where the lessor provides:
The asset along with crew, maintenance, and insurance (ACMI).
Finance for buying the asset.
Only the fuel.
Only the asset (Aircraft) without insurance or crew.
Explanation:
In a Wet Lease, the lessor provides the aircraft, complete crew, maintenance, and insurance. A Dry Lease involves only the aircraft.
15. The "Primary Period" in a lease usually refers to:
The period when the asset is scrapped.
The initial negotiation phase.
The period after the lease expires.
The non-cancellable period during which the lessor recovers the cost of the asset.
Explanation:
The Primary Period is the basic non-cancellable term of the lease aiming at cost recovery + profit. The Secondary Period follows, often with nominal rent.