In a Direct-Financing Lease

question 18

Multiple Choice

In a direct-financing lease,

• A) the lessor owns the asset and records the depreciation of the leased asset in its accounts.
• B) the lessee owns the asset and records the depreciation of the leased asset in its accounts.
• C) the lessor includes the lease payments as unearned income.
• D) the lessee recognizes the right-of-use asset at the commencement of the lease.

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Definitions:

Adverse Selection

A situation where asymmetric information leads to the selection of undesirable risks by one party in a transaction, often seen in insurance and financial markets.

Moral Hazard

When a party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event.

Asymmetric Information

Asymmetric information exists when one party in a transaction has more or better information than the other, potentially leading to an imbalance in power or unfair outcomes.

Standardization

The process of making something conform to a standard, typically to facilitate compatibility and interoperability among multiple items or systems.