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CA Intermediate · Financial Management and Strategic Management · Types of Financing

A firm leases equipment under a finance lease for 4 years. Which feature below is characteristic of a finance lease rather than an operating lease?

A finance lease is typically non-cancellable and covers most of the asset's life, with the lessee bearing maintenance and insurance costs. The lessor recovers its investment from a single lessee, unlike an operating lease, which is short, cancellable and lessor-serviced.

  1. AThe lessee bears maintenance and insurance, and the lease is non-cancellable for most of the asset's lifeCorrect
  2. BThe lessor bears maintenance and the lease is short and cancellable
  3. CThe lease covers only a small part of the asset's economic life with full lessor servicing
  4. DThe lessor expects to recover cost through repeated leasing to different lessees

Explanation

A finance lease is long-term, non-cancellable, and typically fully amortises the lessor's investment, with the lessee bearing maintenance and insurance. The other options describe operating lease features: short term, cancellable, lessor servicing, and re-leasing.

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