CLFP Chapter 1 - NG Latest Version 2025 Fully Solved

CLFP Chapter 1 - NG Latest Version 2025 Fully Solved Railroads - Answers First to spread leasing through the US Equipment Lease - Answers use and possession, but not title to tangible property is transferred for consideration 2010 B.C. - Answers Oldest record, in the Sumerian City of Ur. Used clay tablets for documenting leases for agricultural tools, land and water rights, and oxen and other animals The Code of Hammurabi - Answers 1750 B.C. King Hammurabi acknowledged leasing of personal property in his code of laws. First Record of Leasing Law. Ship Charters - Answers Early example of a True Lease. Phoenicians were shipping and trading experts to obtain a ship and crew. Charters covered the economic life of the ship and required the lessee to assume the benefits and obligations of ownership. Statute of Whales - Answers - 1284 A.D. English Common Law. - Used in England to deal directly with leasing of personal property. - Further clarified in 1571 to define who actually owned the leased property Industrial Revolution - The Railroad Industry - Answers - In the UK and US, RR companies could afford the track - Financed the locomotives and railcars from private investors - Done through equipment trusts - Most well known: The Philadelphia Plan. Helped spur leasing growth in the US Independent Leasing Companies (early 1900's) - Answers - Formed to provide vendor financing for Manufacturers - Benefit of leasing to move product and gave rise to early captives Start of WWII - Answers The government used cost-plus contracts making leasing attractive again post-depression Cost-Plus Contract - Answers Agreement typically used in the construction industry by a client to reimburse a company for building expenses stated in a contract, plus a dollar amount of profit over and above expenses, usually stated as a percentage of the contract's full price. Shift to Modern Leasing (1950's) - Answers - Economic slump post WWII - Government tried stimulating the economy (Section 167 of the IRC) Section 167 of the Internal Revenue Code (1953) - Answers - 1953 - Gave owner/lessor ability to take ordinary payments into income associated with a lease and accelerate depreciation - Designed to encourage capital spending. -Deferring the taxes to later periods by taking larger deductions up front. What led to modern day leasing? - Answers - Governmental efforts to stimulate the economy - The Introduction of Accelerated Depreciation IRS Revenue Ruling 55-540: 1955 - Answers - Defines what is NOT a true lease for tax purposes - 6 criteria - if any aren't met, the IRS determines the lease to be a CSC and tax benefits go to the lessee IRS Revenue Ruling 55-540 Purpose - Answers - The IRS Revenue Ruling 55-540 defines a true lease for TAX purposes. -All criteria must be met to be a true lease IRS Revenue RULING 55-540 (PAINEE) - Answers - P (Payments Rental) - A (Automatic Title) - I (Interest) - N (Nominal PO) - E (Equity) - E (Excessive Payments) PAINEE - P - Answers Payments Rental Rental payments are NOT substantially higher than a fair rental value PAINEE - A - Answers Automatic Title - Ownership of the asset does NOT automatically pass to the lessee at the end of the term PAINEE - I - Answers Interest - No portion of the lease payment is characterized as interest PAINEE - N - Answers Nominal PO - The transaction does NOT include a nominal purchase option PAINEE - E 1 - Answers Equity - No portion of the lease payments can be applied to an equity position in the asset PAINEE - E2 - Answers Excessive Payments - The amount paid under a short-term lease is NOT a significant portion of the purchase price Investment Tax Credit (1962) - Answers - A credit a taxpayer was permitted to claim on its federal tax return - A direct offset to tax liability as a result of ownership of qualified equipment. -Became "give and take option" for the government spending on capital needs Controller of the Currency - 1963 - Answers - Gave banks the go-ahead to own and lease personal property - This brought a significant amount of capital held by banks into the leasing market - Tax Benefit Asset Depreciation Range (1972) - Answers - 1972, introduced by congress - Lessors no longer have to guess the useful like of an asset Revenue PROCEDURE 75-21 Purpose (1975) - Answers - 1975 - Addressed requests whether the lessor could be treated as the owner for tax purposes -Used to determine if a lease is to be considered a "true lease" for tax purposes -6 criteria used by IRS to respond to rulings FASB 13 Purpose (1976) - Answers - Issued 1976 - Provided consistency in financial statement reporting - Now ASC 842 Revenue Procedure 75-21 Criteria - Answers Subordinate to 55-540 Ruling. The following had to be met to assure favorable ruling: - Initial minimum investment (at least 20% risk lease term) - Lease term and renewal options (Between 1 and 20 years) - Purchase and sale rights (No bargain purchase option) - No investment by lessee (Lessee cannot also be an investor) - No lease loans or guarantees (Recourse) - Profit requirement (Lessor must expect profit outside of ITC) ASC 842 - Answers - Title to the property automatically transfers to the lessee by or at the end of the lease term - Lease contains a bargain purchase option - Lease term is equal to or greater than 75% of the estimated economic life of the leased property - Present value of the minimum lease payments at the lease beginning of the lease is equal to or greater than 90% of the FMV of the property -The underlying asset is of specialized nature (NEW criteria) Economic Recovery Tax Act (ERTA) (1981) - Answers - 1981 - Revision to the Internal Revenue Code; replaced more complex Asset Depreciation Range (ADR) system with Accelerated Cost recovery System ACRS - Only 5 asset classes (3-15 years) - Specifies the percentage of cost to be written off each year - The owner/lessor could fully depreciate an asset without having to estimate the useful like and salvage value -90 day window for transference of ITC and vesting of 20% per year