AC 204 Study Outline

AC 204 Study Outline - AC 204 Study Outline Chapter 21...

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AC 204 Study Outline Chapter 21: Accounting for Leases The Leasing Environment o Who are the Players? Lease- a contractual agreement between the lessor and the lessee. Gives the lessee the right to use specific property, owned by the lessor for a specified period of time. Banks Largest players Low-cost funds o Able to purchase assets at less cost than competitors. Captive leasing companies Subsidiaries whose primary business is to perform leasing operations for the parent company. Independents Market share has dropped recently Often good at developing innovative contracts Starting to act as captive finance companies for some companies that don’t have a leasing subsidiary o Advantages of Leasing 100% Financing at fixed rates Often no down payment Conserve scarce cash Fixed payments o Protection against inflation Protection against obsolescence Lessor adds cost of new lease to old lease balance less trade-in value Flexibility Less costly financing Tax advantages Off-Balance-Sheet Financing o Conceptual Nature of a Lease Views on capitalization Do not capitalize any leased assets o No ownership o “executory” contract requiring continuing performance by both parties Capitalize leases that are similar to installment purchases o
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