MULTIPLE-CHOICE QUESTIONS WITH ANSWERS RELATED TO LEASING OF PLANT AND MACHINERY
Which type of lease might include a “renewal option”?
a) Finance lease
b) Operating lease
c) Sale and leaseback
d) Both a) and b)
Answer: d) Both a) and b)
In the context of leasing, what is “interest rate implicit in the lease”?
a) The interest rate used to discount lease payments to present value
b) The interest rate charged by the lessor for late payments
c) The market interest rate for similar leases
d) The rate at which the lessee can borrow from a bank
Answer: a) The interest rate used to discount lease payments to present value
What does “lease classification” determine?
a) The tax treatment of the lease
b) Whether the lease is recorded on the balance sheet
c) The type of asset being leased
d) The length of the lease term
Answer: b) Whether the lease is recorded on the balance sheet
In a “capital lease,” who is responsible for insurance of the asset?
a) Lessor
b) Lessee
c) Shared between lessor and lessee
d) Third-party insurer
Answer: b) Lessee
Which of the following is a typical characteristic of a finance lease?
a) Short lease term compared to the economic life of the asset
b) Lease payments that are not sufficient to recover the lessor’s investment
c) Transfer of ownership to the lessee at the end of the lease term
d) High flexibility in usage terms
Answer: c) Transfer of ownership to the lessee at the end of the lease term
How is a finance lease generally treated for tax purposes by the lessor in India?
a) As a sale of the asset
b) As rental income
c) As an operating lease
d) As a capital lease
Answer: b) As rental income
Which of the following documents is essential for a lease transaction?
a) Lease agreement
b) Purchase order
c) Delivery note
d) Warranty certificate
Answer: a) Lease agreement
In an operating lease, the lease payments are treated as what type of expense by the lessee?
a) Capital expense
b) Operating expense
c) Financing expense
d) Depreciation expense
Answer: b) Operating expense
What is the primary risk for the lessor in an operating lease?
a) Depreciation risk
b) Default risk by the lessee
c) Risk of obsolescence of the asset
d) Both b) and c)
Answer: d) Both b) and c)
In leasing, what is “purchase option”?
a) The lessee’s right to buy the leased asset at a predetermined price
b) The lessor’s right to sell the asset to a third party
c) The option to renew the lease at the end of the term
d) The ability to modify the lease terms
Answer: a) The lessee’s right to buy the leased asset at a predetermined price
What type of lease requires the lessee to maintain the leased asset?
a) Triple net lease
b) Gross lease
c) Operating lease
d) Finance lease
Answer: a) Triple net lease
How does the lessee benefit from a “net lease”?
a) Lower lease payments
b) Ownership of the asset
c) Reduced maintenance responsibility
d) Higher flexibility in lease terms
Answer: a) Lower lease payments
Which of the following typically applies to an operating lease but not to a finance lease?
a) Capitalization of the lease on the balance sheet
b) Depreciation of the leased asset by the lessee
c) Lower monthly payments
d) Transfer of ownership at the end of the lease term
Answer: c) Lower monthly payments
What does “lease escalation clause” refer to?
a) A clause that increases lease payments over time
b) A clause that decreases lease payments over time
c) A clause that provides for early termination
d) A clause that allows for subleasing
Answer: a) A clause that increases lease payments over time
Who typically bears the risk of damage to the asset in a finance lease?
a) Lessor
b) Lessee
c) Both lessor and lessee
d) Insurance company
Answer: b) Lessee
Which of the following is an advantage of leasing for the lessor?
a) Immediate ownership of the asset
b) Regular income stream
c) Lower risk of asset obsolescence
d) Reduced maintenance costs
Answer: b) Regular income stream
In an operating lease, how are lease payments usually structured?
a) As a lump sum payment at the beginning of the lease term
b) As periodic payments throughout the lease term
c) As a final payment at the end of the lease term
d) As performance-based payments
Answer: b) As periodic payments throughout the lease term
What is a “closed-end lease”?
a) A lease where the lessee is not responsible for the asset’s residual value
b) A lease where the lessee can terminate the lease early
c) A lease that automatically renews at the end of the term
d) A lease that requires a balloon payment at the end
Answer: a) A lease where the lessee is not responsible for the asset’s residual value
How is a “capital lease” different from an “operating lease” in terms of asset recognition?
a) Capital lease assets are recognized on the balance sheet
b) Operating lease assets are recognized on the balance sheet
c) Both are recognized similarly
d) Neither is recognized on the balance sheet
Answer: a) Capital lease assets are recognized on the balance sheet
What is the impact of a finance lease on a company’s financial ratios?
a) Decreases debt-to-equity ratio
b) Increases debt-to-equity ratio
c) No impact on financial ratios
d) Improves liquidity ratios
Answer: b) Increases debt-to-equity ratio
What is a “full-service lease”?
a) A lease where the lessor covers maintenance, insurance, and taxes
b) A lease that includes an option to purchase the asset
c) A short-term lease agreement
d) A lease that allows subleasing
Answer: a) A lease where the lessor covers maintenance, insurance, and taxes
Which type of lease might have a “fair market value” purchase option at the end of the term?
a) Finance lease
b) Operating lease
c) Sale and leaseback
d) Leveraged lease
Answer: b) Operating lease
What is the primary consideration for a company when choosing between leasing and buying an asset?
a) Cost of the asset
b) Depreciation method
c) Impact on cash flow and financial statements
d) The asset’s useful life
Answer: c) Impact on cash flow and financial statements
How does a “synthetic lease” benefit a company?
a) It allows the company to keep the asset off its balance sheet
b) It reduces the company’s tax liability
c) It provides ownership of the asset
d) It lowers lease payments
Answer: a) It allows the company to keep the asset off its balance sheet
What is the purpose of a “lease buyout”?
a) To purchase the leased asset before the end of the lease term
b) To extend the lease term at a lower rate
c) To sublease the asset to another party
d) To terminate the lease agreement early
Answer: a) To purchase the leased asset before the end of the lease term
In a “triple net lease,” which costs are typically borne by the lessee?
a) Only lease payments
b) Lease payments, maintenance, insurance, and property taxes
c) Lease payments and insurance
d) Lease payments and maintenance
Answer: b) Lease payments, maintenance, insurance, and property taxes
Which of the following is an advantage of leasing over purchasing for a company?
a) Ownership of the asset
b) High initial capital expenditure
c) Flexibility in upgrading technology
d) Reduced total cost over the asset’s life
Answer: c) Flexibility in upgrading technology
In which scenario is a “step lease” commonly used?
a) When the lease payments decrease over time
b) When the lease payments remain constant
c) When the lease payments increase over time
d) When the lease payments are tied to the asset’s usage
Answer: c) When the lease payments increase over time
What is a “balloon payment” in the context of leasing?
a) A large payment due at the beginning of the lease term
b) A large payment due at the end of the lease term
c) Periodic payments that vary based on usage
d) Equal payments spread over the lease term
Answer: b) A large payment due at the end of the lease term
What is “lease recharacterization”?
a) Changing the terms of a lease to benefit the lessor
b) Changing a lease from an operating lease to a finance lease or vice versa
c) Terminating a lease early without penalty
d) Subleasing the asset to another party
Answer: b) Changing a lease from an operating lease to a finance lease or vice versa
How does the lessee account for lease payments under an operating lease in their income statement?
a) As interest expense
b) As rental expense
c) As depreciation expense
d) As a capital expenditure
Answer: b) As rental expense
What is the typical consequence for the lessor if the lessee defaults on an operating lease?
a) The asset is repossessed and re-leased or sold
b) The lease term is extended
c) The lease payments are forgiven
d) The asset is transferred to the lessee
Answer: a) The asset is repossessed and re-leased or sold
In a lease agreement, what does “FMV” stand for?
a) Fixed Monthly Value
b) Fair Market Value
c) Financial Market Variable
d) Final Maturity Value
Answer: b) Fair Market Value
Which of the following is a key feature of a leveraged lease?
a) The lessee finances the asset entirely on their own
b) The lessor finances the asset with significant debt
c) The asset is leased at a reduced rate
d) The lessee has the option to buy the asset at a predetermined price
Answer: b) The lessor finances the asset with significant debt
What does “lease syndication” involve?
a) Multiple lessors providing a lease to a single lessee
b) A single lessor providing a lease to multiple lessees
c) Pooling of assets to lease to a single lessee
d) The transfer of lease obligations to a third party
Answer: a) Multiple lessors providing a lease to a single lessee
In a lease agreement, what is “residual risk”?
a) The risk that the lessee will default on the lease payments
b) The risk associated with the asset’s value at the end of the lease term
c) The risk of changes in interest rates
d) The risk of legal disputes between the lessor and lessee
Answer: b) The risk associated with the asset’s value at the end of the lease term
What is a “split-lease” arrangement?
a) A lease where the payments are divided between two parties
b) A lease for a part of the asset’s useful life
c) A lease where the asset is shared between two lessees
d) A lease with variable payment terms
Answer: c) A lease where the asset is shared between two lessees
What type of lease might include a “purchase option” at the end of the lease term?
a) Operating lease
b) Finance lease
c) Open-end lease
d) Both b) and c)
Answer: d) Both b) and c)
Which of the following is not typically included in a lease agreement?
a) Lease term
b) Payment schedule
c) Asset depreciation method
d) Maintenance responsibilities
Answer: c) Asset depreciation method
What is the primary benefit of a “true lease” for tax purposes?
a) Depreciation deductions for the lessee
b) Lease payments are treated as rental expense
c) Ownership benefits for the lessee
d) Reduced initial payments
Answer: b) Lease payments are treated as rental expense
In the context of leasing, what does “lessor’s risk” refer to?
a) Risk of not receiving lease payments
b) Risk of asset obsolescence
c) Risk of asset damage
d) All of the above
Answer: d) All of the above
What does “non-recourse lease” mean?
a) The lessor cannot pursue the lessee beyond the asset for recovery
b) The lessee has no obligation to maintain the asset
c) The lessor bears all the maintenance costs
d) The lessee can terminate the lease at any time without penalty
Answer: a) The lessor cannot pursue the lessee beyond the asset for recovery
What is a “leasehold interest”?
a) The interest rate charged on lease payments
b) The lessee’s right to use the leased asset
c) The lessor’s ownership of the asset
d) The value of the leased asset at the end of the term
Answer: b) The lessee’s right to use the leased asset
In which type of lease does the lessee have no responsibility for the asset’s residual value?
a) Finance lease
b) Operating lease
c) Open-end lease
d) Leveraged lease
Answer: b) Operating lease
What is the impact of an operating lease on the lessee’s debt-to-equity ratio?
a) It increases the ratio
b) It decreases the ratio
c) It has no impact on the ratio
d) It significantly alters the ratio
Answer: c) It has no impact on the ratio
What does “lease renewal option” allow the lessee to do?
a) Terminate the lease before the end of the term
b) Purchase the asset at a predetermined price
c) Extend the lease term under specified conditions
d) Sublease the asset to another party
Answer: c) Extend the lease term under specified conditions
What is a “finance lease” also commonly known as?
a) Capital lease
b) Operating lease
c) Service lease
d) Short-term lease
Answer: a) Capital lease
In a finance lease, which of the following is true about the lease payments?
a) They are treated as operating expenses
b) They cover both principal and interest components
c) They are paid as a lump sum at the end of the lease term
d) They do not affect the lessee’s balance sheet
Answer: b) They cover both principal and interest components
What is a “lease inducement”?
a) An incentive offered by the lessor to the lessee to sign the lease agreement
b) A penalty for early termination of the lease
c) A mandatory maintenance requirement for the lessee
d) A clause that escalates lease payments over time
Answer: a) An incentive offered by the lessor to the lessee to sign the lease agreement
What is the main purpose of a “sale and leaseback” transaction?
a) To increase the lessor’s asset base
b) To provide liquidity to the seller-lessee
c) To transfer ownership of the asset to the lessee
d) To lower lease payments
Answer: b) To provide liquidity to the seller-lessee
