Questions and Answers
An organization exercises due diligence if it maintains reasonable routines for communicating significant ______ to the person conducting the transaction.
information
Due diligence does not require an individual acting for the organization to communicate information unless the communication is part of the individual’s regular ______.
duties
A notice or notification received by an organization is effective for a particular transaction from the time it is brought to the attention of the individual conducting that ______.
transaction
Due diligence involves reasonable compliance with the ______ established by the organization.
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Whether a transaction in the form of a lease creates a lease or security ______ is determined by the facts of each case.
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An organization will be considered to have exercised due diligence if it has exercised ______ regarding significant information.
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A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the ______.
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The original term of the lease is equal to or greater than the remaining economic life of the ______.
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The lessee is bound to ______ the lease for the remaining economic life of the goods.
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The lessee has the option to renew the lease for the remaining economic life of the goods for no additional ______.
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The lessee has an option to become the ______ of the goods for no additional consideration.
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The lessee assumes the ______ of loss of the goods.
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The lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or ______ or maintenance costs.
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The lessee has the option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market ______ for the use of the goods.
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Additional consideration is nominal if it is less than the lessee’s reasonably predictable cost of performing under the ______ agreement if the option is not exercised.
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Additional consideration is not nominal if the rent is stated to be the fair market rent for the use of the goods for the term of the ______.
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If the lessee is granted the option to become the owner of the goods, the price must be stated to be the fair market ______ of the goods determined at the time the option is to be performed.
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The remaining economic life of the goods and reasonably predictable fair market rent or fair market value must be determined with reference to the facts and circumstances at the time the ______ is entered into.
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A person gives value for rights if they acquire them in return for a binding commitment to extend ______.
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An action is taken seasonably if it is taken at or within the time ______ or, if no time is agreed, at or within a reasonable time.
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A lessee's cost of performing under the lease agreement must be reasonably ______ for it to be considered nominal.
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An option to renew the lease must state the rent as the fair market rent for the use of the goods for the term of the ______.
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Study Notes
Lease as Security Interest
- A lease creates a security interest if lessee's payment obligation is for the lease term and cannot be terminated.
- Conditions under which lease qualifies as security interest:
- Lease term equals or exceeds remaining economic life of the goods.
- Lessee bound to renew lease or to become the owner for the economic life of the goods.
- Lessee has an option to renew lease for nominal additional consideration.
- Lessee can become owner for nominal additional consideration upon lease compliance.
Factors Not Indicating Security Interest
- A lease does not create a security interest solely based on:
- Present value of lease payments being equal to or greater than the fair market value of goods.
- Lessee assuming the risk of loss.
- Lessee paying taxes, insurance, or maintenance costs related to the goods.
- Options for renewal or ownership alone do not create a security interest.
- Fixed rent for renewal equal to or exceeding fair market rent is insufficient alone.
- Fixed price for ownership equal to or exceeding fair market value at option time does not indicate a security interest.
Notice and Due Diligence in Transactions
- Notice is effective from when it reaches the individual handling a transaction or when it should have reached them with due diligence.
- Organizations must maintain routines for significant information communication to relevant individuals.
- Due diligence does not mandate communication unless part of regular duties or aware of transaction’s relevance.
Distinguishing Lease from Security Interest
- The classification of a transaction as a lease or security interest is determined by specific case facts.
- Additional consideration is nominal if it falls below lessee’s predicted cost under the lease if the option is not exercised.
Definitions of Value and Time
- A person gives value in transactions through:
- Binding commitment for credit, even if not drawn upon.
- Security for preexisting claims.
- Acceptance of delivery under a prior purchase contract.
- Any consideration that supports a simple contract.
- Reasonableness of action timing depends on the action's nature and circumstances.
- An action is "seasonable" if done within agreed time or within a reasonable period if no time is specified.
Economic Life and Fair Market Considerations
- Remaining economic life and fair market values are determined by facts at the transaction's initiation.
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Description
Test your understanding of leases and how they may create security interests. This quiz covers key conditions under which a lease qualifies as a security interest, focusing on the economic life of goods and the lessee's obligations. Challenge your knowledge and see how well you grasp these important concepts.
