CLFP Financial And Tax Accounting For Leases Practice Exam

What costs are considered executory costs in a lease arrangement?

The costs such as insurance, maintenance and taxes incurred for the leased property, whether paid by the lessor or the lessee. Also include costs paid by the lessee as guarantor. Fees charged by the broker for initiating the lease. Depreciation of the asset over the lease term. Acquisition cost of the asset.

Correct Answer:

The costs such as insurance, maintenance and taxes incurred for the leased property, whether paid by the lessor or the lessee. Also include costs paid by the lessee as guarantor.

Explanation:

Executory costs are the ongoing, operating expenses required to run the leased property during the lease term. They include items like insurance, maintenance, and property taxes, regardless of who actually pays them or whether the lessee acts as guarantor. These costs are not tied to the asset’s purchase price and are not depreciation or acquisition expenses. Broker fees are upfront transactional costs, not ongoing operating costs. Depreciation relates to the asset’s use by the owner, not the ongoing operating costs of the lease. Acquisition cost is the upfront price to obtain the asset, not an ongoing operating expense.

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