If a Lessor Borrows Money from a Lender on a Nonrecourse

question 12

Multiple Choice

If a lessor borrows money from a lender on a nonrecourse basis to purchase an asset that will be leased to another party, then the:

• A) lessor is responsible for the loan payments whether or not the lessee pays the lease payments.
• B) lessee must pay both the lease payment and the loan payment.
• C) loan is considered paid in full if the lessee discontinues making the lease payments or terminates the lease early.
• D) lessor is only obligated to pay the loan payments as long as the lessor is collecting the lease payments.
• E) lender must pursue the lessor if the lessee fails to make the agreed upon lease payments.

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Definitions:

Direct Write-Off Method

This accounting practice writes off bad debts directly against income at the time they are determined to be uncollectible, bypassing any allowance account.

Allowance for Doubtful Accounts

This is an estimation of the amount of receivables that a company does not expect to actually collect, reflecting potential losses due to customers' inability to pay.

Uncollectible

Uncollectible refers to debts or receivables that are deemed to be impossible to collect, often resulting in a write-off by the business.

Maturity Value

The amount that will be received at the end of a bond or other debt instrument's term.