CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

In a direct financing lease agreement that does not contain a bargain purchase option or title transfer to the lessee, the lessor should continue to depreciate the asset over the term of the lease. True or False?
Correct Answer: False

Since a direct financing lease is a capital lease, the lessee, not the lessor, records the asset and related capital lease liability on its books and depreciates it.

User Contributed Comments 11

User Comment
niti according to definition,ans is true!!
jjowen look, the question is asking the lessor, not the lessee, so it's false.
jnashville I think this as true as well as it states that it does not title transfer to the lessee, thus the lessor keeps ownership and would continue to depreciate the asset
Piersy jjowen is correct. Under a capital lease legal ownership of the leased asset has been transferred from the lessor to the lessee. The non-title transfer refered to in the question is in reference to ownership of the asset at the end of the lease term, not the begining. Basically it has been worded into the question to trick you.
mtcfa Tricky wording.
surob Very good question
moneyguy Does the Lease Receivables Account on the Lessor's books also incur depreciation?
gill15 I dont like the questioning. There's no bargain purchase or transfer of ownership to Lessee so it cant be a capital lease on the Lessee side.

But on the Lessor side we have to meet one of those criteria and the revenue recongnition one for it to be classified as capital on the lessor side. How do we know its a capital lease here?
johntan1979 Here's the answer to your question:

Direct financing is what type of lease?
GBolt93 gill15 capital leases don't require bargain purchase or transfer of ownership at the end of the lease. If it was a Capital lease for over 75% of its useful life or the MLP's constituted 90% of the PV of the equipment it still qualifies as a capital lease.
ashish100 Tricky indeed. The person who created this must have been a psychology major as well. He/she really knows how to mess with our heads.
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