1. What is the primary characteristic of a lease?
- A. Ownership of the asset transfers immediately
- B. The lessee must purchase the asset at market value
- C. Right to use an asset for a specified period in return for payment
- D. It is always interest-free
A lease provides the lessee the right to use an asset for a fixed period in exchange for periodic payments, without transferring ownership.
2. Which of the following is NOT a feature of a lease?
- A. Periodic rental payments
- B. Immediate ownership transfer
- C. Asset remains on lessor’s balance sheet
- D. Contracted lease period
Ownership does not transfer immediately in a lease; the asset usually remains on the lessor’s books during the lease term.
3. Which type of lease transfers substantially all risks and rewards of ownership to the lessee?
- A. Finance lease / Capital lease
- B. Operating lease
- C. Service lease
- D. Bare lease
In a finance lease, the lessee assumes most risks and rewards of ownership, unlike an operating lease where the lessor bears them.
4. An operating lease is typically characterized by:
- A. Lessee capitalizes the asset fully
- B. Long-term lease beyond useful life
- C. Transfer of ownership at lease end
- D. Short-term lease with lessor retaining risks
Operating leases are usually short-term, and the lessor retains ownership risks and rewards while the lessee enjoys asset use.
5. Which of the following is a key advantage of leasing for businesses?
- A. Ownership of asset without payment
- B. Preserves working capital and reduces upfront cost
- C. Exempt from taxes entirely
- D. Avoids all maintenance responsibility
Leasing allows businesses to use assets without large initial investment, helping preserve cash and working capital.
6. Which type of lease is often used for high-value equipment like aircraft and machinery?
- A. Operating lease
- B. Service lease
- C. Finance lease
- D. Sale and leaseback
Finance leases are suitable for expensive assets where the lessee intends to use the asset long-term and bear most risks and rewards.
7. What is the main rationale for a company to opt for leasing instead of buying an asset?
- A. Preserve capital and maintain liquidity
- B. Avoid all legal obligations
- C. Transfer ownership immediately
- D. Completely eliminate maintenance costs
Leasing allows companies to use assets without heavy upfront investment, preserving cash and liquidity for other operations.
8. Which of the following is typically included in a lease agreement?
- A. Employee salaries of the lessor
- B. Stock market investments of the lessee
- C. Lease term, rental amount, rights, and obligations of parties
- D. Tax exemptions unrelated to the lease
A lease agreement clearly defines lease period, payment terms, responsibilities, and rights of both lessor and lessee.
9. Which legal principle ensures that lease agreements are enforceable in India?
- A. Companies Act
- B. Indian Penal Code
- C. Banking Regulation Act
- D. Indian Contract Act, 1872
Lease agreements are contracts, and their enforceability in India is governed by the Indian Contract Act, 1872.
10. In a standard lease agreement, which of the following is the responsibility of the lessor?
- A. Making payments for asset usage
- B. Providing the asset in usable condition
- C. Recording depreciation on lessee’s books
- D. Paying income tax on lessee’s behalf
The lessor is responsible for supplying the asset in good working condition so that the lessee can use it as per lease terms.
11. Which of the following legal aspects is important for a lease to be valid?
- A. Free consent and lawful object
- B. Lease must be registered under Companies Act
- C. Lessee must be a bank
- D. Lessor must own other assets
For a lease to be legally enforceable, it must have free consent, a lawful object, and parties competent to contract under the Indian Contract Act.
12. Sale and leaseback arrangement is mainly used to:
- A. Evade taxes
- B. Transfer ownership without cash
- C. Unlock funds tied up in owned assets
- D. Avoid lease agreements
Sale and leaseback allows businesses to sell an owned asset to a lessor and lease it back, raising funds while continuing to use the asset.
13. Which of the following best defines a finance lease?
- A. A lease where the lessee assumes most risks and rewards of ownership
- B. A short-term lease where the lessor retains ownership
- C. A lease used only for residential purposes
- D. A lease that is interest-free
In a finance lease, the lessee bears most risks and rewards of ownership, while the lessor mainly finances the asset.
14. Operating leases are usually preferred by companies because:
- A. They always transfer ownership at the end
- B. They require full upfront payment
- C. They allow short-term use without capitalizing the asset
- D. They are tax-free
Operating leases provide flexibility and do not require the lessee to capitalize the asset, making them suitable for short-term use.
15. Which of the following is recorded on the lessee’s balance sheet in a finance lease?
- A. Only lease rentals paid
- B. Only interest on lease
- C. Only asset residual value
- D. Asset and corresponding lease liability
In a finance lease, the lessee records both the leased asset and the corresponding lease liability on the balance sheet.
16. Which of the following is a key difference between finance and operating leases?
- A. Finance leases are short-term; operating leases are long-term
- B. Ownership risk and reward is transferred in finance leases but not in operating leases
- C. Only operating leases require periodic payment
- D. Finance leases are always interest-free
Finance leases transfer most risks and rewards of ownership to the lessee, while operating leases keep these with the lessor.
17. A company chooses an operating lease over a finance lease mainly because:
- A. It does not want to show the asset on its balance sheet
- B. It wants to acquire ownership quickly
- C. It wants to pay full asset value upfront
- D. It wants to avoid paying rent
Operating leases allow companies to use assets without recording them on the balance sheet, helping with off-balance sheet financing.
18. Which type of lease often has a bargain purchase option at the end of the lease term?
- A. Operating lease
- B. Service lease
- C. Finance lease
- D. Short-term rental
Finance leases sometimes include a bargain purchase option, allowing the lessee to buy the asset at below-market price at lease end.
19. Which of the following is typically the responsibility of the lessor in an operating lease?
- A. Paying depreciation on lessee books
- B. Recording lease liability
- C. Making lease rentals
- D. Maintaining the asset
In an operating lease, the lessor retains ownership and is generally responsible for maintaining the asset during the lease term.
20. Which lease type is more suitable for assets with rapid technological obsolescence?
- A. Finance lease
- B. Operating lease
- C. Capital lease with purchase option
- D. Bare lease
Operating leases are preferred for assets that become obsolete quickly, as they allow short-term usage without long-term commitment.
21. In a finance lease, how is the leased asset recorded in the books of the lessee?
- A. Not recorded, as it belongs to the lessor
- B. Recorded only when ownership transfers
- C. Recorded as an asset with a corresponding lease liability
- D. Recorded as an expense immediately
Under finance lease accounting, the lessee recognizes the leased asset and the corresponding lease liability on the balance sheet.
22. How does the lessor record a finance lease in its books?
- A. As an immediate sale and expense
- B. Only as rental income when received
- C. As a capital asset with no liability
- D. As a lease receivable and remove asset from books
In a finance lease, the lessor removes the asset from its books and recognizes a lease receivable representing future lease payments.
23. Which accounting treatment is generally followed for operating leases by the lessee?
- A. Capitalize the asset and record depreciation
- B. Record lease rental as an expense in the income statement
- C. Record asset but no liability
- D. Record asset and lease receivable
For operating leases, the lessee does not capitalize the asset; lease rentals are treated as an expense in the income statement.
24. In leasing as a financing decision, one major advantage is:
- A. Guaranteed ownership at zero cost
- B. No legal contract required
- C. Provides asset usage without large upfront investment
- D. Avoids all accounting entries
Leasing allows businesses to acquire the use of assets without tying up significant capital, aiding liquidity management.
25. Which of the following is a key consideration for a company when deciding between buying an asset or leasing it?
- A. Color and brand of the asset
- B. Cash flow impact and financing cost
- C. Employee preferences
- D. Location of the supplier
Companies analyze cash flow, cost of finance, and balance sheet impact when choosing to lease or purchase an asset.
26. In a finance lease, lease payments are divided into:
- A. Principal and tax only
- B. Depreciation and maintenance
- C. Interest and principal components
- D. Only operating expenses
Finance lease payments include an interest component and reduction of the principal lease liability over the lease term.
27. For tax purposes, lease rentals paid under an operating lease are generally:
- A. Treated as capital expenditure
- B. Not allowed as deduction
- C. Treated as asset acquisition
- D. Allowed as business expense deduction
Operating lease payments are considered operating expenses and can be deducted from taxable income as business expenses.
28. In the books of the lessor, interest income from a finance lease is recognized:
- A. Over the lease term using the effective interest rate method
- B. Only at the beginning of the lease
- C. Only at the end of the lease
- D. As a capital gain
Lessor recognizes interest income from finance leases over time using the effective interest rate on the lease receivable.
29. Which of the following factors is most relevant in deciding to lease an asset instead of purchasing it?
- A. Color of the asset
- B. Cost of capital and asset utilization period
- C. Name of the lessor
- D. Employee preference
Companies consider financing cost and duration of asset use when deciding between leasing and purchasing.
30. What is the effect of a finance lease on the lessee’s balance sheet?
- A. No effect, as it is off-balance sheet
- B. Only lease expense is recorded
- C. Asset and corresponding lease liability are recorded
- D. Only interest component is recorded
Finance leases require the lessee to record both the leased asset and the lease liability on the balance sheet, reflecting financial obligations.
