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1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Corporate Finance, 12e (Ross) Chapter 21 Leasing 1) In a direct lease arrangement, the owner of the asset is: A) either the lessee or the lessor. B) the lessee. C) the lessor. D) either the lessee or the manufacturer. E) the asset's manufacturer. 2) Which one of these characteristics does not apply to a financial lease? A) The lease is usually not fully amortized. B) The lessee is responsible for the maintenance of the leased assets. C) Generally, the lease cannot be cancelled. D) The lessee usually has the right to renew the lease on expiration. E) The lessee must pay all the lease payments. 3) If Alby's leases equipment directly from the equipment's manufacturer the lease must be a: A) leveraged lease. B) sales and leaseback arrangement. C) capital lease. D) sales-type lease. E) bargain lease. 4) An operating lease generally: A) has a term that exceeds the economic life of the leased asset. B) is fully amortized. C) cannot be cancelled. D) requires the lessee to return the leased asset to the lessor if the lease is cancelled. E) requires the lessee to maintain the leased asset. 5) If the lessor borrows the majority of the purchase price of a leased asset, the lease is called a: A) leveraged lease. B) sale-and-leaseback arrangement. C) capital lease. D) nonrecourse lease. E) bargain purchase lease. 6) A financial lease has which one of the following characteristics? A) Lessor maintains leased asset B) Cost of asset exceeds lease payments C) Cancellation clause D) Lessor must make all lease payments E) Fully amortized
2 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7) A leveraged lease typically involves a nonrecourse loan which means that in the case of default the: A) lease payments go directly to the lender. B) the lessee obtains a first lien on the leased assets. C) lessor is obligated to fulfill the terms of both the lease and the loan. D) lessee assumes the loan obligation in exchange for the title to the leased assets. E) lease is automatically cancelled. 8) The city of Plainview sold its maintenance facility in an all-cash transaction and used the proceeds to improve the city's financial position. The city then leased the building from the new owner on a non-cancellable basis. The city will be responsible for the maintenance and upkeep of the facility. These transactions illustrate: A) an operating lease. B) a leveraged lease. C) a sale and leaseback. D) a fully amortized lease. E) both an operating lease and a sale and leaseback. 9) For accounting purposes, which one of the following conditions would automatically cause a lease to be classified as a capital lease? A) The lessee can purchase the asset at fair market value at the end of the lease. B) The lease transfers ownership of the asset to the lessee by the end of the lease term. C) The lease term equals 60 percent or more of the asset's estimated economic life. D) The present value of the lease payments equals 75 percent of the asset's fair market value at lease inception. E) The lessor can renew the lease at the end of the lease term. 10) Reed Machinery just signed a capital lease agreement with a present value of $260,000. How would this lease first appear on Reed Machinery's balance sheet? A) Capital leases do not appear on the balance sheet. B) Assets under capital lease $260,000; Obligations under capital lease $260,000 C) Assets under capital lease $130,000; Obligations under capital lease $130,000 D) Assets under capital lease $260,000; Retained earnings committed to leases $260,000 E) Assets under capital lease $130,000; Retained earnings committed to leases $130,000 11) As of 2018, FAS 13, Accounting for Leases requires: A) all leases, of any type, be recorded on the lessee's balance sheet. B) capital leases be recorded in the footnotes or scheduled section of the lessee's financial statements. C) sale and leaseback arrangements be recorded on the lessee's balance sheet with all other leases recorded elsewhere in the financial statements. D) operating leases be recorded on the lessee's balance sheet as an asset and offsetting liability. E) all leases with bargain purchase price options to be recorded on the lessee's balance sheet.
3 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 12) When a lease must be recorded on the balance to meet FAS 13, the asset amount is set equal to the: A) amount of the lease payments due within the next 12 months. B) present value of the lease payments. C) amount of the lease payments due within the current fiscal year. D) present value of the lease payments due within the next 12 months. E) total sum of all the remaining lease payments. 13) FAS 13 sets forth four criteria for determining whether or not a lease must be classified as a capital lease. How many of these criteria must be met for capital lease classification? A) All four criteria B) Any three of the four C) Any two of the four D) Any one of the four E) Any two of the four provided the lessee has ownership rights at the end of the lease 14) As of 2019, operating leases: A) appear as offsetting items on the lessee's balance sheet. B) are fully expensed at the time the lease is established. C) are excluded from the lessee's financial reports. D) are treated the same as a purchase. E) are disclosed in the financial statement footnotes. 15) Fresh Fish has assets valued at $1.2 million and liabilities of $.98 million. The firm wants to obtain new equipment via a capital lease. The equipment costs $200,000 and the present value of the lease payments is $175,000. With the lease, the firm's balance sheet will show assets of ________ and liabilities of ________. A) $1,375,000; $1,375,000 B) $1,400,000; $1,180,000 C) $1,400,000; $1,400,000 D) $1,375,000; $1,155,000 E) $1,400,000; $1,155,000 16) Sizzler's is considering either purchasing or leasing an asset that costs $28,000, has a life of 6 years, and a zero salvage value. The firm has a tax rate of 21 percent and a borrowing rate of 7 percent. The firm can lease the asset for five years with lease payments of $4,500 payable the first of each year. This lease would be classified as a(n): A) operating lease because the asset life is less than 10 years. B) operating lease because there is no cost reduction. C) leveraged lease because it is being financed with debt. D) capital lease because the lease term is greater than 75 percent of the economic life. E) sale and leaseback arrangement because Sizzler's obtains full use of the asset.
4 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 17) Benji's is considering leasing a machine effective June 2019 for a period of four years with monthly payments of $680. The present value of the lease will be $27,325 and the tax rate will be 21 percent. If the lease is classified as an operating lease, what amount, if any, should appear in the asset section of the balance sheet on the effective date of the lease? A) $5,738 B) $21,587 C) $0 D) $27,325 E) $32,640 18) If a lease term is 35 years the IRS will classify the lease as a: A) financial lease. B) operating lease. C) capital lease. D) conditional sale. E) sale and leaseback arrangement. 19) To meet IRS guidelines for leasing, the lease should: A) limit the lessee's right to issue debt or pay dividends while the lease is operative. B) offer renewal options only at fair market value. C) pay a very low rate of return to the lessor. D) transfer ownership of the asset at the end of the lease at below fair market value. E) have a term of 30 years or more. 20) One key reason why the IRS is concerned about the structure of lease contracts is because: A) firms that lease generally pay no taxes. B) leasing usually leads to bankruptcy. C) leases can be set up solely to avoid taxes. D) leasing leads to off-balance-sheet-financing. E) lease payments can never be deducted as a business expense. 21) A lease with which one of these characteristics would not be qualified by the IRS? A) Term of 25 years B) Early balloon payments C) Lessee option to purchase asset at fair market value at lease expiration D) No lease provision limiting the lessee's right to issue additional debt E) Lessee granted first option to meet a competing outside renewal offer 22) Which one of these can be ignored when valuing a purchase versus a lease? A) Tax shield from depreciation B) Investment outlay for the asset C) Changes in operating costs related to the acquired asset D) Lease payments E) Taxes