CA Intermediate · Financial Management and Strategic Management · Types of Financing
Under a finance lease, which statement is correct?
In a finance lease the lessor transfers substantially all the risks and rewards of ownership to the lessee. It is generally non-cancellable and long-term, with the lessee usually bearing maintenance and insurance, unlike an operating lease where the lessor retains these.
- AThe lessor transfers substantially all risks and rewards of ownership to the lesseeCorrect
- BThe lease is cancellable at any time without penalty by the lessee
- CThe lessee is responsible only for rentals and never for maintenance or insurance
- DThe lessor provides maintenance services and bears obsolescence risk
Explanation
A finance lease is a long-term, non-cancellable arrangement in which the lessee bears substantially all risks and rewards, typically also maintenance and insurance. The statements about cancellability and lessor maintenance describe an operating lease.
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