You are planning to acquire an asset for use in your business. Should you lease or...

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Accounting

You are planning to acquire an asset for use in your business.Should you lease or purchase the asset? What do you feel thedifferences are between the two options. You may find it helpful tolook outside the textbook for information on this. Try to keep itsimple but try to describe some advantages and disadvantages toboth options.

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Lease defination the accountingpolicies applicable for all types of leases except certain listed below Alease is a transaction whereby anagreement is entered into by the lessor with the lessee for the right to use an asset by the lessee in return for a payment or series of payments for an agreed period of time There are two types of leases 1 Finance Lease 2 Operating Lease Finance Lease A lease in which all risks and rewards are transferred to the owner of assets The title may or may not eventually be transferred Examples of Finance Lease are 1 Lease in which Assets is transferred to lessee at the end of lease term 2 Lease term in which lessee has the option to purchase the assets form lessor at the price which is lower than fair price on the date when option become exercisable 3 Lease term Covers complete economic life of the asset even if title is not transferred 4 Lease term in which present value of the minimum lease payments is equal to or substantially covers the fair value of the leased asset 5 Leased asset is of a specialized nature Ex Ambulance the lessee can use it without major modifications being made OPERATING LEASE Any other lease other than finance lease is considered as an Operating Lease Advantages and disadvantages Advantages Leasing offers the following advantages 1 Liquidity The lessee can use the asset to earn without investing money in the asset He can employ his funds for working capital needs 2 Convenience Leasing is the easiest method of financing fixed assets No mortgage or hypothecation is required Restrictions involved in longterm borrowing from financial institutions are avoided Formalities involved in leasing are much less than in case of borrowing from financial See Answer

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