FINA 4700 exam 2

how does ASC 842 impact both lessees and lessors?

Lessees must recognize both an asset and a liability for operating leases, while lessors may need to change sales techniques since lessees no longer benefit from off-balance sheet financing.

Under ASC 842, which of the following conditions would classify a lease as a finance lease rather than an operating lease?

The lease includes a bargain purchase option allowing the lessee to buy the asset at a significantly reduced price.

Under ASC 842, how does a lessor determine the net investment in a sales-type lease?

By subtracting unearned income from the gross investment.

A lessor enters into a lease agreement for an MRI machine with the following terms:

• Lease term: 36 months

• Residual value: Estimated to be 60% of the original price

• Lessee purchase option: Available at 4% of the original price

• Lessor's yield: 14%

Under ASC 842, how should this lease be classified from the lessor’s perspective?

Sales-Type Lease – The lease includes a bargain purchase option (4%), making it highly probable that the lessee will acquire ownership, meeting the criteria for a finance lease.

From the lessor’s perspective, how is an operating lease accounted for under ASC 842?

The leased property remains capitalized in the fixed asset section of the balance sheet and is depreciated over the lease term down to its residual value.

According to IRS Revenue Procedure 2001-28, which of the following factors must be met for the lessor to be considered the owner of the property for tax purposes?

The lessee may not have a contractual right to purchase the property for less than fair market value when the purchase option is exercised.

Which of the following definitions is INCORRECT based on lease accounting terms?

Contingent Rentals – Fixed lease payments that do not change based on external factors.

According to Revenue Ruling 55-540, which of the following conditions may cause a transaction to NOT be considered a lease for tax purposes?

The total lease payments required for a short period of use constitute an excessively large proportion of the total sum required to acquire title to the property.

Which of the following is NOT a key component of a financial statement?

Accountant’s Letter – A required financial statement that summarizes the company's daily transactions.

Which of the following statements about tax accounting for leases is TRUE?

Tax classification criteria are influenced by multiple factors, including the tax code, court rulings, IRS private letter rulings, and administrative rules, making them more complex than accounting standards.

Which of the following best describes the role of the Five C’s of Credit in equipment finance?

They provide a framework to assess the borrower and transaction to estimate chances of default and determine the feasibility of the deal.

Which of the following statements best describes the purpose of the Risk Appetite Framework in an equipment finance company?

It serves as a foundation for decision-making by outlining risk appetite, policies, procedures, and guidelines

Which of the following best describes the role of Probability of Default (PD) and Loss Given Default (LGD) in assessing expected loss for a credit package?

PD estimates the likelihood that a borrower will be unable to repay, while LGD measures how much a financial institution would lose if the borrower defaults.

Which of the following best explains why the size and complexity of a transaction lead to increased data, due diligence, and analysis requirements?

Larger transactions require more extensive credit policies, experienced professionals, and advanced technology to balance cost efficiency, risk management, and regulatory compliance.

Which of the following best describes the role of Know Your Customer (KYC) in the credit process for equipment financing?

KYC ensures that financial institutions properly identify the legal owners and decision-makers of a business, balancing due diligence with transaction efficiency and risk management.

Which of the following is NOT commonly used as a credit evaluation tool in the commercial equipment finance industry?

Credit Insurance Reports

Which of the following trends would generally indicate an improving financial position for a company in commercial equipment finance?

An increasing Net Profit Margin and a decreasing Total Liabilities to Net Worth

Which of the following does not belong in the category of Profitability Ratios?

Current Ratio

Which of the following statements about Traditional Cash Flow Analysis is false?

If historical cash flow does not cover new lease payments, the analyst may adjust the evaluation.

Which of the following best describes the purpose of the Debt-to-EBITDA ratio in financial analysis?

It evaluates a company's ability to meet its debt obligations using its operating income.

Which statement best explains the Time Value of Money?

A dollar today is worth more than a dollar in the future because it can be invested to earn interest.

Using T-Value or other financial caluator, determine the future value (FV), as follows:

🔹 Calculation:
RESID (FV) = Solve for
I% = 7% per annum
TERM = 12 months (1 year)
LEASE = $1.00

$1.07

Which of the following best defines the Implicit Rate?

The value of rent (or payments) and residual stated as an annual percentage rate.

In finance, what does the term "Points" refer to?

The percentage of profit or commission that is “priced in” or “to be paid” to a broker, originator, or seller in a transaction.

Using T-Value or other financial caluator, determine the payment (PMT) as of March 1, 2025, as follows:

🔹 Calculation:
PMT = Solve for
I% = 7% per annum
TERM = 12 months (1 year)
LEASE = $100,000

$8,652.67

What is the key difference between an advance payment and payments in advance in a lease agreement?

Advance payment refers to a single upfront payment required at the beginning of the lease, while payments in advance means that regular payments are made at the start of each period instead of the end.

What is the primary purpose of a security deposit in a lease or loan transaction?

It is an additional amount that may be required in place of, or in addition to, advanced payments to mitigate risk or enhance the yield of a transaction.

Which of the following is NOT considered an unusual payment structure?

Equal Monthly Payments – Fixed payments made in the same amount throughout the entire contract.

Question:
Which of the following is a key tax benefit for the lessor in a true tax lease?

The lessor can recognize both the full lease payments as rental income and claim depreciation on the equipment.

A company is financing equipment with the following lease terms:

Equipment Cost: $185,000
Residual Value: $18,500
Lease Term: 60 months
Interest Rate: 15% annually
No Advance Payments, IDC, Security Deposit, or Other Fees

What is the required monthly lease payment (PMT)?

$4,192.27