Management 120B Midterm Exam
Questions And Answers
What are the situations where a finance lease applies? -
correct answer ✅- The lease transfers ownership of the underlying
asset to the lessee by the end of the lease term. (Automatic
Transfer)
- The lease grants the lessee an option to purchase the underlying
asset that the lessee is reasonably likely to exercise. (Discount
Purchase Option)
- The lease term is for the major part of the remaining economic life
of the underlying asset. (Useful Life Exhausted) [approx 75%]
- The present value of the sum of the lease payments, including any
residual value guaranteed by the lessee, equals or exceeds
substantially all of the fair value of the underlying asset. (Fair Value
Paid) [approx 90%]
- The underlying asset is of such a specialized nature that it is
expected to have no alternative use to the lessor at the end of the
lease term. (Specialized asset)
When parties enter a finance lease, the lessee records the asset as
if ____________________. As a result, the lessee records the asset
at _____________________. It then _________________ the asset
as if it owns it. It also records a ____________ ________________
equal to ______________________________. Each payment is
then allocated between ________________ and
