Capital_Leases_Study_Note - 1 CAPITAL LEASES n a lease...

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Unformatted text preview: 1 CAPITAL LEASES n a lease agreement the owner of the property is called as the lessor . As the opposite party of the lease agreement the person or the entity who temporarily obtains the right of the usage of the property called as the lessee . Lease agreements, in general, are for limited time periods. After the stated time period the lessor takes back the right of usage of its property. In most of the lease contracts, the contract term usually covers relatively short period of times. These types of leasing contracts are categorized as Operating Leases . Renting a car for a week to travel the Mediterranean Coast of Turkey is one example of operating leases; as signing a lease contract for an apartment with a contract term of one year is another. Most of the lease contracts that we see in our ordinary daily lives are operating leases. There is also another type of lease contract that substantially covers longer period of time which is usually almost equal to the economic life of the asset. In most cases, this type of contract gives to the lessee as many rights as if the owner of the property is the lessee. Although the legal ownership belongs to the lessor during the entire contract term, the time period, that the term covers, is so long, that the lessee has most of the rights related with the usage as if it is the real owner. With these characteristics, this type of lease contracts are considered to be another kind of loan agreement, that is used in financing purchase of property. Therefore this category of lease contracts is called as Capital Leases or Financial Leases . The typical characteristics to distinguish a Capital Lease are as follows: 1) Legal ownership is transferred to the lessee at the end of the lease, 2) Lessee has an option to purchase the asset as a bargain price, 3) The term of the lease is for the most of the economic life of the asset (e.g. 75% or more) 4) The present value of the lease payments is 90 percent or more of the fair value of property In todays business world, there are firms that are specialized in providing financing through leasing contracts. Being in the lessor position in lease contracts, these companies are called Financial Leasing Companies . To summarize, a capital lease is just another name for an...
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This note was uploaded on 06/03/2009 for the course FIN 5308 taught by Professor Mckenzie during the Spring '07 term at Youngstown State University.

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Capital_Leases_Study_Note - 1 CAPITAL LEASES n a lease...

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