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

Under a finance lease, which of the following is a feature that distinguishes it from an operating lease?

A finance lease runs for most of the asset's economic life, is generally non-cancellable, and leaves the risks and rewards of ownership, such as maintenance and obsolescence, with the lessee. Cancellability, lessor-borne risks and repeated re-leasing are characteristics of operating leases.

  1. AThe lessor bears the risk of obsolescence and maintenance cost
  2. BThe lease is usually cancellable at short notice by the lessee
  3. CThe lease period covers most of the asset's economic life and the lessee bears the risks incidental to ownershipCorrect
  4. DThe lessor expects to recover the cost through repeated leasing to different lessees

Explanation

A finance lease is a non-cancellable, full-payout arrangement over most of the asset's useful life, with the lessee bearing maintenance, insurance and obsolescence risks. The other three options describe features of an operating lease, where the lessor bears risks, the lease is cancellable and the asset is leased repeatedly.

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