Lease Law, Tax, and Accounting Flashcards

A lease agreement includes a variable payment based on the lessee's annual sales. Under ASC 842, how are these variable lease payments measured in the initial lease liability?

Answer: Excluded from the lease liability unless they depend on an index or rate

Variable lease payments that depend on sales or usage (not an index or rate) are excluded from the lease liability measurement and are recognized as expense when incurred.

The 'residual value guarantee' provided by a lessee to a lessor at the end of a lease term is significant because it:

Answer: Increases the lessee's lease liability by the amount of the guarantee

Lessee-provided residual value guarantees are included in the lease payment calculation, increasing the present value of lease payments and thus the lease liability.

Under the Internal Revenue Code, how must a tax-exempt entity treat income from unrelated business activities that include equipment leasing?

Answer: The income may be subject to Unrelated Business Income Tax (UBIT)

Tax-exempt organizations that engage in equipment leasing as a trade or business unrelated to their exempt purpose may owe Unrelated Business Income Tax (UBIT) on that income.

In the event of a lessee's bankruptcy under Chapter 11, what must the lessee (debtor-in-possession) do with an unexpired equipment lease within the time period set by the court?

Answer: The debtor must assume or reject the lease within the court-prescribed period

Under the Bankruptcy Code, a Chapter 11 debtor-in-possession must assume or reject unexpired leases of personal property within a court-set deadline, typically 60 days from the filing date.

Which of the following best describes the accounting treatment for lease incentives (e.g., free rent periods) received by a lessee under ASC 842?

Answer: Reduce the measurement of the ROU asset at lease commencement

Under ASC 842, lease incentives received reduce the initial measurement of the lessee's ROU asset rather than being recorded as a separate deferred credit.

A 'net lease' arrangement in equipment leasing means that:

Answer: The lessee is responsible for taxes, insurance, and maintenance costs in addition to rent

In a net lease, the lessee pays base rent plus additional 'nets' such as property taxes, insurance premiums, and maintenance expenses.

When a lessor reassesses lease classification during the lease term under ASC 842, reclassification from operating to finance lease is required only when:

Answer: A lease modification grants the lessee an additional right of use not in the original contract

Under ASC 842, a lease modification that grants an additional right of use not included in the original lease is treated as a new lease and must be classified based on current facts.