CLFP Exam Questions with Verified Solutions Latest Version 2025 Rated A+
Bailment - Answers Delivery of property from a bailor to a bailee with an obligation by the bailee to
return it.
Book Accounting - Answers Method of accounting used to report a company's financial activity.
Bundle Lease - Answers A lease that includes additional services such as maintenance, insurance and
property tax that are paid by the lessor.
Business Lease - Answers A lease in which the lessee has entered in to it for business purposes.
Capital Lease - Answers A lease that has the characteristics of a purchase agreement and meets the
FASB 13 requirements.
Chattel Mortgage - Answers A lien placed on personal property for the purposes of securing a debt.
Closed End Lease - Answers A lease that DOES NOT contain a purchase or renewal option. Lessee HAS TO
RETURN the equipment.
Conditional Sales Contract - Answers a. financing of property, title which will pass only when the buyer
has met their obligations. b. lessee is treated as the owner of the asset for IRS (55-540; IF PETS), but,
clouds title by a lien until all terms are met.
Consumer Lease - Answers A lease in which the lessee enters to acquire property for personal, family or
household use.
Direct Financing Lease - Answers A capital lease that DOES NOT give rise to manufacturers or dealer's
profit (or loss) to the lessor.
Discounted Lease - Answers A lease in which the payment stream is assigned by the lessor to a funding
source in return for immediate payment of the PV of the stream of payments.
Dry Lease - Answers A NET LEASE, traditionally for aircraft or marine vessels, which requires the LESSEE
TO PROCURE all personnel, fuel and provisions necessary to operate the craft.
Factoring - Answers The assignment by a lessee of accounts receivable to a lessor as collateral for a
specified term and payment amount resulting in liquidity to improve cash flow or make capital
acquisitions.
Finance Lease - Answers A net lease, used to finance the use of property for the majority of its useful
life.
Full Payout Lease - Answers A lease in which the LESSOR RECOVERS, through the lease payments, ALL
COSTS incurred in the lease plus an acceptable rate of return, WITHOUT reliance on the leased
property's RESIDUAL value.
,Installment Loan - Answers Any loan, the terms of which call for regular or irregular periodic payments,
the sum of which will repay the debt and interest.
Lease Intended as security - Answers A transaction in which the form is a lease, but the substance is a
conditional sale contract or a loan with a security agreement on the property.
Leveraged Lease - Answers Any lease involving, at minimum, a lessee, a lessor and a funding source from
whom the lessor borrows a significant portion of the cost of equipment and holds an (minimum of 20%)
equity position.
Master Lease - Answers A document under which a lessee may add additional schedules representing
property later acquired, subject to the same general terms and conditions.
Money-over-Money Lease - Answers A NON-TAX or CSC where the title is intended to pass to the lessee
at the end of the lease term.
Municipal Lease - Answers A lease to a municipality or government agency, which isn't typically a true
lease and from which the interest earnings to the lessor are tax exempt.
Net Lease - Answers A lease in which all costs associated with use, maintenance, insurance, and
property taxes are PAID separately BY the LESSEE (i.e. not included in rental payment).
Non-tax Lease - Answers 1. Any lease in which the lessee is, or will automatically become, the owner
during or at lease end, and, is entitled to all of the tax beneifts of ownership (e.g. money-over-money,
CSC, purchase money security agreement, or lease intended as security).
Open-End Lease - Answers A lease in which the LESSEE GUARANTEES the future RESIDUAL value of the
property to be realized by the lessor at lease end.
Operating Lease - Answers Any lease that has the characteristics of a usage agreement and also fails to
meet any of the FASB 13 rules for a capital lease.
Purchase Money Security Interest - Answers A security interest granted in property to secure the
payment of the purchase price of the property.
Sale-Leaseback - Answers A transaction under which the lessee sells the property to be leased to the
lessor and then leases back the same property. (considered a lease in its form, but substantively more
like a loan or chattel mortgage).
Sales Type Lease - Answers A capital lease that GIVES rise to manufacturer's or dealer's PROFIT to the
lessor.
Section 38 Property - Answers Any asset on which depreciation may be taken, as defined by the IRS.
Section 179 - Answers IRS code allowing taxpayer to deduct certain types of property as a direct expense
against income rather than depreciating the asset over its tax life.
, Service Lease (Gross or Maintenance Lease) - Answers A lease in which the lessor provides such services
as maintenance for the leased property. The cost of services may be built into the payments or paid
separately.
Single Investor Lease - Answers A lease under which the lessor is fully at risk for all funds used to
purchase the equipment and is a 2 party transaction, lessor + lease.
Term Loan - Answers Any loan with a fixed maturity date.
Trac Lease - Answers A lease on automobiles, trucks or trailers which may be a true lease for IRS,
despite, that it contains a Terminal Rental Adjustment Clause (TRAC) which guarantees the lessor the
residual value. The lessor must: (a) maintain a minimum at-risk position equal to the borrowings used to
fund the vehicle (b) Obtain a lessee certification that the lessee will use the vehicle more than 50% for
business.
True Lease (Tax Lease) - Answers A lease, which for tax purposes, fails to meet all of the tests for a
conditional sale contract under IRS ruling 55-540, therefore, the lessor qualifies for the tax benefits of
ownership and lessee to claim the entire amount of the lease payment as a tax deduction.
Wet Lease - Answers A GROSS LEASE, traditionally for aircraft or marine vessels in which the lessor
provides bundled services such as the payment of property taxes, insurance, maintenance costs, all
personnel, fuel, and provisions to operate the craft.
Ruling 55-540 (1955) - Answers Tax ruling that classified a conditional sale contract as a transaction
having all of the following conditions (IF PETS) [Its a true lease if it failed these]: 1. Interest - some
portion of the payment is characterized as interest. 2. Fair Market - payments were substantially higher
than fair market. 3. Purchase - nominal purchase option at lease end. 4. Equity - a portion of the
payment could be applied to an equity position in the asset. 5. Title - ownership automatically transfers
at lease end. 6. Sum - sum of payments was a significant portion of the purchase price.
Investment Tax Credit (ITC) - Answers Provided purchasers of equipment with a tax credit they could use
to offset their total tax liability. Initially it was 7% of the OEC. When the feds needed more tax money
they took this away. This was eliminated with the Tax Reform Act (TRA '86).
Tax Reform Act (TRA '86) - Answers The 2 major impacts of this act were the elimination of ITC and that
businesses began keeping 2 sets of books, 1 for accounting and 1 for tax purposes.
Alternative Minimum Tax (AMT) - Answers A tax calculation where the company has to pay the greater
of the regular tax calculation or the this tax. Triggered by an event like accelerated depreciation,
prevents a taxpayer from excessively reducing it tax liability.
Asset Depreciation Ranges (ADR '72) - Answers Provided the lessor with a method for selecting a useful
life that could not be challenged by the IRS.
Bailment - Answers Delivery of property from a bailor to a bailee with an obligation by the bailee to
return it.
Book Accounting - Answers Method of accounting used to report a company's financial activity.
Bundle Lease - Answers A lease that includes additional services such as maintenance, insurance and
property tax that are paid by the lessor.
Business Lease - Answers A lease in which the lessee has entered in to it for business purposes.
Capital Lease - Answers A lease that has the characteristics of a purchase agreement and meets the
FASB 13 requirements.
Chattel Mortgage - Answers A lien placed on personal property for the purposes of securing a debt.
Closed End Lease - Answers A lease that DOES NOT contain a purchase or renewal option. Lessee HAS TO
RETURN the equipment.
Conditional Sales Contract - Answers a. financing of property, title which will pass only when the buyer
has met their obligations. b. lessee is treated as the owner of the asset for IRS (55-540; IF PETS), but,
clouds title by a lien until all terms are met.
Consumer Lease - Answers A lease in which the lessee enters to acquire property for personal, family or
household use.
Direct Financing Lease - Answers A capital lease that DOES NOT give rise to manufacturers or dealer's
profit (or loss) to the lessor.
Discounted Lease - Answers A lease in which the payment stream is assigned by the lessor to a funding
source in return for immediate payment of the PV of the stream of payments.
Dry Lease - Answers A NET LEASE, traditionally for aircraft or marine vessels, which requires the LESSEE
TO PROCURE all personnel, fuel and provisions necessary to operate the craft.
Factoring - Answers The assignment by a lessee of accounts receivable to a lessor as collateral for a
specified term and payment amount resulting in liquidity to improve cash flow or make capital
acquisitions.
Finance Lease - Answers A net lease, used to finance the use of property for the majority of its useful
life.
Full Payout Lease - Answers A lease in which the LESSOR RECOVERS, through the lease payments, ALL
COSTS incurred in the lease plus an acceptable rate of return, WITHOUT reliance on the leased
property's RESIDUAL value.
,Installment Loan - Answers Any loan, the terms of which call for regular or irregular periodic payments,
the sum of which will repay the debt and interest.
Lease Intended as security - Answers A transaction in which the form is a lease, but the substance is a
conditional sale contract or a loan with a security agreement on the property.
Leveraged Lease - Answers Any lease involving, at minimum, a lessee, a lessor and a funding source from
whom the lessor borrows a significant portion of the cost of equipment and holds an (minimum of 20%)
equity position.
Master Lease - Answers A document under which a lessee may add additional schedules representing
property later acquired, subject to the same general terms and conditions.
Money-over-Money Lease - Answers A NON-TAX or CSC where the title is intended to pass to the lessee
at the end of the lease term.
Municipal Lease - Answers A lease to a municipality or government agency, which isn't typically a true
lease and from which the interest earnings to the lessor are tax exempt.
Net Lease - Answers A lease in which all costs associated with use, maintenance, insurance, and
property taxes are PAID separately BY the LESSEE (i.e. not included in rental payment).
Non-tax Lease - Answers 1. Any lease in which the lessee is, or will automatically become, the owner
during or at lease end, and, is entitled to all of the tax beneifts of ownership (e.g. money-over-money,
CSC, purchase money security agreement, or lease intended as security).
Open-End Lease - Answers A lease in which the LESSEE GUARANTEES the future RESIDUAL value of the
property to be realized by the lessor at lease end.
Operating Lease - Answers Any lease that has the characteristics of a usage agreement and also fails to
meet any of the FASB 13 rules for a capital lease.
Purchase Money Security Interest - Answers A security interest granted in property to secure the
payment of the purchase price of the property.
Sale-Leaseback - Answers A transaction under which the lessee sells the property to be leased to the
lessor and then leases back the same property. (considered a lease in its form, but substantively more
like a loan or chattel mortgage).
Sales Type Lease - Answers A capital lease that GIVES rise to manufacturer's or dealer's PROFIT to the
lessor.
Section 38 Property - Answers Any asset on which depreciation may be taken, as defined by the IRS.
Section 179 - Answers IRS code allowing taxpayer to deduct certain types of property as a direct expense
against income rather than depreciating the asset over its tax life.
, Service Lease (Gross or Maintenance Lease) - Answers A lease in which the lessor provides such services
as maintenance for the leased property. The cost of services may be built into the payments or paid
separately.
Single Investor Lease - Answers A lease under which the lessor is fully at risk for all funds used to
purchase the equipment and is a 2 party transaction, lessor + lease.
Term Loan - Answers Any loan with a fixed maturity date.
Trac Lease - Answers A lease on automobiles, trucks or trailers which may be a true lease for IRS,
despite, that it contains a Terminal Rental Adjustment Clause (TRAC) which guarantees the lessor the
residual value. The lessor must: (a) maintain a minimum at-risk position equal to the borrowings used to
fund the vehicle (b) Obtain a lessee certification that the lessee will use the vehicle more than 50% for
business.
True Lease (Tax Lease) - Answers A lease, which for tax purposes, fails to meet all of the tests for a
conditional sale contract under IRS ruling 55-540, therefore, the lessor qualifies for the tax benefits of
ownership and lessee to claim the entire amount of the lease payment as a tax deduction.
Wet Lease - Answers A GROSS LEASE, traditionally for aircraft or marine vessels in which the lessor
provides bundled services such as the payment of property taxes, insurance, maintenance costs, all
personnel, fuel, and provisions to operate the craft.
Ruling 55-540 (1955) - Answers Tax ruling that classified a conditional sale contract as a transaction
having all of the following conditions (IF PETS) [Its a true lease if it failed these]: 1. Interest - some
portion of the payment is characterized as interest. 2. Fair Market - payments were substantially higher
than fair market. 3. Purchase - nominal purchase option at lease end. 4. Equity - a portion of the
payment could be applied to an equity position in the asset. 5. Title - ownership automatically transfers
at lease end. 6. Sum - sum of payments was a significant portion of the purchase price.
Investment Tax Credit (ITC) - Answers Provided purchasers of equipment with a tax credit they could use
to offset their total tax liability. Initially it was 7% of the OEC. When the feds needed more tax money
they took this away. This was eliminated with the Tax Reform Act (TRA '86).
Tax Reform Act (TRA '86) - Answers The 2 major impacts of this act were the elimination of ITC and that
businesses began keeping 2 sets of books, 1 for accounting and 1 for tax purposes.
Alternative Minimum Tax (AMT) - Answers A tax calculation where the company has to pay the greater
of the regular tax calculation or the this tax. Triggered by an event like accelerated depreciation,
prevents a taxpayer from excessively reducing it tax liability.
Asset Depreciation Ranges (ADR '72) - Answers Provided the lessor with a method for selecting a useful
life that could not be challenged by the IRS.
