What does Article 2A of the UCC define?

• A. A Finance Lease
• B. An Operating Lease
• C. A Conditional Sale
• D. A Service Contract

Answer: (A)

Leases of goods under Article 2A are classified by who bears the risks and rewards of ownership. When the arrangement transfers substantially all of those risks and rewards to the lessee, it is called a finance lease. Article 2A spells out several ways this can happen: the lessee ends up owning the goods by the end of the term, the lessee has a bargain purchase option, the lease term is for a major portion of the asset’s remaining economic life, the present value of the lease payments is basically equal to the asset’s fair value, or the goods are so specialized that only the lessee can use them without modification. If none of these conditions apply, the lease would be treated as an operating lease. A conditional sale is a sale-style arrangement outside the lease framework, and a service contract is not a lease at all, so they don’t fit the definition Article 2A provides.