Free CLFP Eligibility Questions and Answers — Questions and Answers
Question 1: What is a Bargain Purchase Option?
- A method of accounting for transactions in which the seller-lessee records the sale , removes the property and related liabilities from its balance sheet, recognizes gain or loss from the sale and classifies the leaseback in accordance with proper lease accounting
- 1.) Created by Job Creation and Worker Assistance Act of 2002 2.) Provides beneficial depreciation acceleration for lessors. 3.) 30% - 100% upfront depreciation in year of purchase followed by MACRS (vary over years) 4.) only available on NEW equipment 5.) 50% extended through 2019
- The estimated residual value of the leased property exclusive of any portion guaranteed by the lessee or by a third party unrelated to the lessor. If the guarantor is related to the lessor, the residual value is considered unguaranteed
- a provision allowing lessee, at his option, to purchase the property for a price sufficiently lower than the expected fair market value of the property at the date the option becomes exercisable. It is reasonably assured the purchase option will be exercised. (Correct answer)
Correct answer: a provision allowing lessee, at his option, to purchase the property for a price sufficiently lower than the expected fair market value of the property at the date the option becomes exercisable. It is reasonably assured the purchase option will be exercised.
A Bargain Purchase Option is a specific clause in a lease agreement that grants the lessee the right to buy the leased asset at a price significantly below its anticipated fair market value at the time the option becomes available. This option is considered a "bargain" because the purchase price is so attractive that it is reasonably certain the lessee will exercise it. Its presence often indicates that the lease is effectively a financing arrangement rather than a true operating lease, impacting accounting and tax classifications.
Question 2: Why is sales tax complicated?
- The price at which the property could be sold at an arm's length transaction by unrelated parties. 1.) normal selling price, net volume discounts, for a lessor who manufacturer/dealer 2.) Cost, net volume discounts for a lessor that is note a manufacturer or dealer.
- Regarding elements of an income statement, this represents income and expenses that are not generated by the usual course of business and are not considered extraordinary. An example would be interest expense.
- 1.) require monthly, quarterly, semi annual or annual 3.) payment may be due upfront or over the stream 4.) certain equipment is exempt for sales tax 5.) sales tax vary per jurisdiction and update periodically (Correct answer)
- 1.) Revenue and expense are recognized in the period in which service is performed or goods are delivered, regardless of when payment is made. 2.) Matching of revenues and expenses
Correct answer: 1.) require monthly, quarterly, semi annual or annual 3.) payment may be due upfront or over the stream 4.) certain equipment is exempt for sales tax 5.) sales tax vary per jurisdiction and update periodically
Sales tax is complicated in the equipment leasing and finance industry due to several factors. Firstly, the frequency of payment requirements (monthly, quarterly, etc.) and whether payments are due upfront or over the lease term can vary significantly. Secondly, specific types of equipment may be exempt from sales tax, adding another layer of complexity. Most importantly, sales tax rates and regulations differ widely across various jurisdictions and are subject to periodic updates, requiring constant vigilance and expertise to ensure compliance.
Question 3: What is Inception of the Lease?
- Accrual
- The date lease commitment. (Correct answer)
- Revenues and expenses are recorded when cash is received or paid.
- [net sales] / [current assets/current liabilities]. this shows how man y $'s are made per one $ of working capital. a low ratio may mean that working capital is not being used efficiently. a very high ratio may mean not enough working capital for the current high sales environment.
Correct answer: The date lease commitment.
The "Inception of the Lease" refers to the date when the major terms and conditions of a lease agreement are finalized and committed to by both the lessor and the lessee. This date is crucial because it often dictates the start of the lease term for accounting purposes and determines the classification of the lease (e.g., operating vs. capital/finance lease). It's the point at which the contractual obligations become binding, even if the equipment hasn't been delivered or payments haven't begun.
Question 4: What are the benefits of accrual basis accounting?
- Regarding elements of a balance sheet, a current asset consisting of interest or dividend-yielding holdings expected to be converted to cash within a year. Also called short term investments including stocks, bonds, CD's and time deposits. Listed at their original cost.
- 1.) may understate liabilities on balance sheet 2.) may overstate income on income statement 3.) not ideal for credit decisions
- 1.) report a company revenue/expenses for a particular period of time 2.) report a company assets/liabilities for a particular period of time 3.) Provide insight into liquidity, leverage and allow insight as to whether they can accommodate more debt. (Correct answer)
- 1.) Operating 2.) Direct financing (capital lease) 3) Sale-type (capital lease) 4) If lender is lending cash - typically capital lease 5) If lender is lending assets - typically operating lease
Correct answer: 1.) report a company revenue/expenses for a particular period of time 2.) report a company assets/liabilities for a particular period of time 3.) Provide insight into liquidity, leverage and allow insight as to whether they can accommodate more debt.
Accrual basis accounting offers significant benefits by providing a more accurate and comprehensive picture of a company's financial performance and position. It records revenues when earned and expenses when incurred, regardless of when cash is exchanged, allowing for proper matching of revenues and expenses. This method enables the reporting of a company's true assets, liabilities, revenues, and expenses for specific periods, offering crucial insights into liquidity, leverage, and the capacity for future debt, which is vital for informed decision-making.
Question 5: What is PreTax income?
- Regarding elements of an income statement, this represents Operating Income plus/less Other Revenue/Expense. (Correct answer)
- Regarding elements of a balance sheet, a current liability consisting of amounts owed to suppliers for goods and services purchased in connection with business operations.
- Regarding elements of a balance sheet, assets consisting of resources not listed with any of the other categories. Examples may include intangible assets, patent, trademarks etc.
- Regarding elements of a balance sheet, equity consisting of the total accumulated net income minus the total accumulated dividends since the company's founding.
Correct answer: Regarding elements of an income statement, this represents Operating Income plus/less Other Revenue/Expense.
Pre-Tax Income, also known as Earnings Before Tax (EBT), is a key line item on a company's income statement. It is calculated by taking the Operating Income and then adding or subtracting any "Other Revenue" or "Other Expense" that falls outside of the company's primary operations. This figure represents the company's profit before any income taxes are deducted, providing a clear view of profitability from core and non-core activities before the impact of taxation.
Free CLFP Eligibility Questions and Answers
What is a Bargain Purchase Option?