CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

A lessee has leased a corporate building for 7 years and has classified it as a capital lease. The collectability of the lease payments is reasonably predictable and no important uncertainties surround the amount of unreimbursable costs to be incurred by the lessor under the lease. There are no manufacturing or dealer profits involved in the deal nor has the lessor leveraged it.

The lessor must classify the deal as a ______.
A. direct financing lease
B. sales-type lease
C. capital lease
Explanation: If the lessee classifies the lease as a capital lease, then the lessor's classification depends on whether the following two additional conditions are satisfied:
1. The collectability of the lease payments is reasonably predictable.
2. No important uncertainties surround the amount of unreimbursable costs to be incurred by the lessor under the lease.

If both these conditions are met, then the lease is a "sales-type lease" if there are manufacturing or dealer profits involved in the deal and a "direct financing lease" otherwise.
If either of these conditions is not satisfied, the lessor must classify the lease as an operating lease (even if the lessee classifies it as a capital lease).

User Contributed Comments 10

User Comment
cissy why not A-capital lease?
johnsk both conditions are met and there is no profit involved, so it is A.
murli If so, when an asset would be classified as "Capital lease" by lessor?
EBIII murli: you ask DEFINITELY too much !
TheRoon Fair question by Murli I reckon.
tengo a capital lease classification is a necessary condition but not sufficient classification if you are a lessor must then pick sales or direct financing type
yly13 note in several questions that a "capital lease" is ALWAYS assummed to be from the lessee's stand.
Adkins If you know the conditions for the sales-type and you know it doesn't fit sales type; best to pick direct financing for the lessor.
micheleus In Lessee's view point: 1.Operating lease
2.Capital lease
In Lessor's view point: 1.Sale-type lease
2.Direct financing lease
Sale type lease:include both manufacturing/selling profit and financing profit
Direct financing lease: leasing company purchase property from manufacturer and leases the equipment to the lesse (only financing profit)

This question said that "There are no manufacturing profit" so it should be direct financing lease
Mikehuynh Nice post from micheleus!
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