CLFP Tax & Accounting in Leasing 3

Question 1

What is 'tax deferral' as a benefit in leveraged leasing?

Accepted Answer

The ability to use accelerated depreciation and interest deductions to defer taxable income to later years, generating interest-free use of deferred taxes

Answer

Paying lease taxes in installments instead of upfront

Answer

Deferring sales tax on equipment purchases to lease end

Answer

Postponing recognition of lease income until cash is received

Question 2

What is 'gain on sale' in the context of a lessor securitizing a lease portfolio?

Accepted Answer

The accounting profit recognized when the present value of future lease cash flows exceeds the carrying value of the leases transferred to a securitization trust

Answer

Profit from selling repossessed equipment at auction

Answer

The difference between original cost and book value at lease end

Answer

Premium income from selling credit insurance on a portfolio

Question 3

How does sales tax typically apply to equipment leases in the United States?

Accepted Answer

Sales tax applicability varies by state—some tax the full equipment price upfront, others tax each periodic payment, and rules differ for true leases vs. conditional sales

Answer

Sales tax never applies to equipment leases at the federal level

Answer

Sales tax is always paid by the lessor on the full equipment purchase price

Answer

Sales tax is only due when the lessee exercises a purchase option

Question 4

What is the 'effective interest method' used for in lease accounting?

Accepted Answer

To allocate each lease payment between interest income/expense and principal reduction based on the outstanding balance and the implicit rate

Answer

To calculate the lessor's profit margin on each deal

Answer

To determine the equipment's fair market value at inception

Answer

To amortize origination costs over the lease term

Question 5

What is 'initial direct cost' (IDC) in lease accounting under ASC 842?

Accepted Answer

Incremental costs directly attributable to originating a lease (e.g., commissions) that would not have been incurred without the lease

Answer

The purchase price paid by the lessor for the equipment

Answer

The cost of filing UCC financing statements

Answer

Setup fees charged to the lessee at lease inception

Question 6

What is the 'present value test' for lease classification, and what threshold is commonly used?

Accepted Answer

If the present value of minimum lease payments equals or exceeds 90% of the fair value of the leased asset, the lease is classified as a finance lease

Answer

If the asset's value exceeds $1 million, it is automatically a finance lease

Answer

If the lease term exceeds 75% of useful life and PV exceeds 50% of fair value

Answer

If three or more of five classification criteria are met