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    Question

    Risk and rewards are transferred in _______ and not in

    _______.
    A Operating Lease & Finance Lease Correct Answer Incorrect Answer
    B Leveraged Lease & Finance Lease Correct Answer Incorrect Answer
    C Direct Lease & Operating Lease Correct Answer Incorrect Answer
    D Finance Lease & Operating Lease Correct Answer Incorrect Answer
    E Operating Lease & Leveraged Lease Correct Answer Incorrect Answer

    Solution

    In a finance lease, the lessee (the person leasing the asset) assumes most of the risks and rewards associated with ownership of the asset. This is because the finance lease is structured in a way that resembles a loan, with the lessee making regular payments to the lessor (the person who owns the asset) in exchange for the use of the asset. The lessee is responsible for maintaining the asset, insuring it, and paying any taxes associated with its use. At the end of the finance lease term, the lessee may have the option to purchase the asset at a predetermined price.  In contrast, in an operating lease, the lessor assumes most of the risks and rewards associated with ownership of the asset. The lessee typically pays a rental fee to the lessor for the use of the asset, but the lessor remains responsible for maintaining the asset, insuring it, and paying any taxes associated with its use. At the end of the operating lease term, the lessee typically returns the asset to the lessor, with no option to purchase it at a predetermined price. Overall, finance leases and operating leases have different characteristics and are used for different purposes, depending on the needs and goals of the parties involved.

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