Question 1

A sale and leaseback arrangement transfers ownership from a user to a lessor who then leases the asset back to the former owner.

Accepted Answer

A) True 
 B)False

Question 2

Some assets are almost impossible to lease short-term because:

Accepted Answer

A)  they are too expensive. 
B)  the assets are hard to transport for use. 
C)  the lessees don't want pay enough. 
D)  the assets to be leased are too susceptible to damage and abuse. 
A)  they are too expensive. 
B)  the assets are hard to transport for use. 
C)  the lessees don't want pay enough. 
D)  the assets to be leased are too susceptible to damage and abuse.

Question 3

Which of the following are specific tests that the Canada Revenue Agency will apply to determine if a particular lease meets the definition of a capital lease? The lease term is equal to 75% or more of the economic life of the leased property.
The present value of the minimum lease payments is equal to 70% or more of the fair value of the leased property at the inception of the lease.
Provisions are made such that ownership of the leased property is transferred to the lessee at the end of the lease term.

Accepted Answer

A)  1 only 
B)  1 and 2 
C)  1 and 3 
D)  2 and 3 
A)  1 only 
B)  1 and 2 
C)  1 and 3 
D)  2 and 3

Question 4

If a financial lease analysis uses a higher discount rate than a lessee would ordinarily use on conventional secured loan,which one of the following reasons would best explain that dichotomy?

Accepted Answer

A)  the lessor charges a higher interest rate on the lease than normally. 
B)  the asset is unreliable, so requires a higher discount rate. 
C)  the lessee may be unsure that he can earn enough taxable income to use the tax shields in the lease analysis. 
D)  the discount rate is uncertain, so a higher one is used. 
A)  the lessor charges a higher interest rate on the lease than normally. 
B)  the asset is unreliable, so requires a higher discount rate. 
C)  the lessee may be unsure that he can earn enough taxable income to use the tax shields in the lease analysis. 
D)  the discount rate is uncertain, so a higher one is used.

Question 5

If the asset in Question above were exactly equal to its undepreciated capital cost instead of zero,what effect would this change have on the financial lease analysis?

Accepted Answer

A)  the salvage would become a benefit of leasing. 
B)  the change would have no effect on the lease analysis. 
C)  the terminal loss would disappear and that would be the only change. 
D)  the terminal loss would disappear and the salvage is now a leasing cost. 
A)  the salvage would become a benefit of leasing. 
B)  the change would have no effect on the lease analysis. 
C)  the terminal loss would disappear and that would be the only change. 
D)  the terminal loss would disappear and the salvage is now a leasing cost.

Question 6

Salvage deserves special consideration in financial lease analysis,just as it does in any capital budgeting situation.Explain how this is true,both in terms of salvage estimates,and in the treatment of salvage and UCC tax shields.

Accepted Answer

If salvage is not zero,the present value

Question 7

Since salvage is more risky than other lease analysis cash flows,it is logical,though not always practical,to use a higher discount rate for salvage in present value calculations in such analysis.

Accepted Answer

A) True 
 B)False

Question 8

In the event of lessee bankruptcy,the lessor's legal position with the leased asset is this:

Accepted Answer

A)  the lessor will be first in line as a creditor to recoup the lease's balance. 
B)  the lessor can take back the leased asset, but with no salvage guarantees. 
C)  the lessor has no recourse at all. 
D)  the lessee will ordinarily pay out the remainder of his lease obligations. 
A)  the lessor will be first in line as a creditor to recoup the lease's balance. 
B)  the lessor can take back the leased asset, but with no salvage guarantees. 
C)  the lessor has no recourse at all. 
D)  the lessee will ordinarily pay out the remainder of his lease obligations.

Question 9

Describe three major differences between operating and financial leases,pointing out how these differences reflect varying lessor and lessee situations.

Accepted Answer

Operating leases are shorter term,do not

Question 10

Leasing is a financial arrangement between a lessor,or owner,and a lessee or user of an asset.

Accepted Answer

A) True 
 B)False

Question 11

Which one of the following conditions is not a single requirement for verifying a financial lease according to Canadian accounting standards?

Accepted Answer

A)  there is reasonable assurance of asset title transfer at the end of the lease. 
B)  the lessee will receive all or most of the asset's economic benefits. 
C)  the lessor is guaranteed a profit on the lease equal to that of other investments. 
D)  the lessor recovers the fair market value of the asset at the time of signing the lease, plus a return on that investment. 
A)  there is reasonable assurance of asset title transfer at the end of the lease. 
B)  the lessee will receive all or most of the asset's economic benefits. 
C)  the lessor is guaranteed a profit on the lease equal to that of other investments. 
D)  the lessor recovers the fair market value of the asset at the time of signing the lease, plus a return on that investment.

Question 12

A sensible,not dubious,reason for a lease would revolve around preserving capital through leasing rather than putting up the full price through owning.

Accepted Answer

A) True 
 B)False

Question 13

In a net lease:

Accepted Answer

A)  the lessee pays for insurance, but does not maintain the asset. 
B)  the lessee pays to maintain, insure, and meet property tax obligations on the asset. 
C)  the lessor pays for insurance, maintenance, and property taxes. 
D)  the lessor and lessee split the maintenance, insurance, and property taxes 50:50. 
A)  the lessee pays for insurance, but does not maintain the asset. 
B)  the lessee pays to maintain, insure, and meet property tax obligations on the asset. 
C)  the lessor pays for insurance, maintenance, and property taxes. 
D)  the lessor and lessee split the maintenance, insurance, and property taxes 50:50.

Question 14

Which of the following is not required to calculate the NPV of a lease?

Accepted Answer

A)  present value of the net benefit that comes from the residual value lost because of leasing. 
B)  original purchase price of the asset. 
C)  present value of CCA lost. 
D)  present value of before-tax lease payments. 
A)  present value of the net benefit that comes from the residual value lost because of leasing. 
B)  original purchase price of the asset. 
C)  present value of CCA lost. 
D)  present value of before-tax lease payments.

Question 15

Which one of the following characteristics does not distinguish financial leases from operating leases?

Accepted Answer

A)  financial lease analysis compares leasing to borrowing. 
B)  financial leases are not cancelable. 
C)  operating leases involve real physical assets. 
D)  operating leases do not extend over the economic life of the asset. 
A)  financial lease analysis compares leasing to borrowing. 
B)  financial leases are not cancelable. 
C)  operating leases involve real physical assets. 
D)  operating leases do not extend over the economic life of the asset.

Question 16

Describe how risk plays a role in financial lease analysis,particularly in discount rates,salvage values,maintenance costs and insolvency circumstances.

Accepted Answer

Risk pervades lease analysis because of

Question 17

If the present value of financial lease payments were $100,000,this capitalized amount would appear:

Accepted Answer

A)  as a liability on the lessee's balance sheet. 
B)  as income on the lessor's income statement. 
C)  as a liability and as an asset on the lessee's balance sheet. 
D)  only on the lessor's financial records. 
A)  as a liability on the lessee's balance sheet. 
B)  as income on the lessor's income statement. 
C)  as a liability and as an asset on the lessee's balance sheet. 
D)  only on the lessor's financial records.

Question 18

If a lessor has a tax bracket much higher than a lessee's,and the CCA tax shields occur early in the lease,there is little incentive for a lessor and lessee to construct a lease to their mutual after-tax benefit.

Accepted Answer

A) True 
 B)False

Question 19

If an asset has a positive salvage of $1,000,exactly equal to UCC,then the lease analysis for an asset alone in its pool will show the following cash flows for that phenomenon.

Accepted Answer

A)  the salvage is a cost to leasing; there is no terminal loss or gain. 
B)  the salvage is a cost of owning, the terminal loss is $1,000. 
C)  salvage has no effect on leasing, since it belongs to the owner. 
D)  the tax shelter for the terminal gain will be $1,000. 
A)  the salvage is a cost to leasing; there is no terminal loss or gain. 
B)  the salvage is a cost of owning, the terminal loss is $1,000. 
C)  salvage has no effect on leasing, since it belongs to the owner. 
D)  the tax shelter for the terminal gain will be $1,000.

Question 20

The best situation to encourage leasing would be one in which:

Accepted Answer

A)  the lease payments are larger in the early part of a short contract. 
B)  the interest rate is low. 
C)  the lessee's tax rate is lower than the lessor's. 
D)  The CCA tax shield occurs late in the lease period. 
A)  the lease payments are larger in the early part of a short contract. 
B)  the interest rate is low. 
C)  the lessee's tax rate is lower than the lessor's. 
D)  The CCA tax shield occurs late in the lease period.

Exam 17: Leasing

A sale and leaseback arrangement transfers ownership from a user to a lessor who then leases the asset back to the former owner.

Some assets are almost impossible to lease short-term because:

If a financial lease analysis uses a higher discount rate than a lessee would ordinarily use on conventional secured loan,which one of the following reasons would best explain that dichotomy?

If the asset in Question above were exactly equal to its undepreciated capital cost instead of zero,what effect would this change have on the financial lease analysis?

Salvage deserves special consideration in financial lease analysis,just as it does in any capital budgeting situation.Explain how this is true,both in terms of salvage estimates,and in the treatment of salvage and UCC tax shields.

Since salvage is more risky than other lease analysis cash flows,it is logical,though not always practical,to use a higher discount rate for salvage in present value calculations in such analysis.

In the event of lessee bankruptcy,the lessor's legal position with the leased asset is this:

Describe three major differences between operating and financial leases,pointing out how these differences reflect varying lessor and lessee situations.

Leasing is a financial arrangement between a lessor,or owner,and a lessee or user of an asset.

Which one of the following conditions is not a single requirement for verifying a financial lease according to Canadian accounting standards?

A sensible,not dubious,reason for a lease would revolve around preserving capital through leasing rather than putting up the full price through owning.

In a net lease:

Which of the following is not required to calculate the NPV of a lease?

Which one of the following characteristics does not distinguish financial leases from operating leases?

Describe how risk plays a role in financial lease analysis,particularly in discount rates,salvage values,maintenance costs and insolvency circumstances.

If the present value of financial lease payments were $100,000,this capitalized amount would appear:

If a lessor has a tax bracket much higher than a lessee's,and the CCA tax shields occur early in the lease,there is little incentive for a lessor and lessee to construct a lease to their mutual after-tax benefit.

If an asset has a positive salvage of $1,000,exactly equal to UCC,then the lease analysis for an asset alone in its pool will show the following cash flows for that phenomenon.

The best situation to encourage leasing would be one in which:

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