Chapter 10 discussion - life saver. Capital Leases 1....

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Discuss the difference between a capital lease and an operating lease from a lessee's point of view. Operating Leases: 1. Operating leases, sometimes called service leases or an off-balance sheet lease are used for short-term leasing and often for assets that are high-tech or in which the technology changes often, like computer and office equipment. 2. Here in the operating lease the equipment buyer is essentially renting the equipment and will return it at the end of the lease or buy it at fair market value, thus the lessee is just using the property but does not take on the benefits or drawbacks of ownership, which are retained by the lessor. 3. The rental cost of an operating lease is considered purely an operating expense. Its only place is on the income statement and it has no bearing on your debt-to-worth ratios or other balance sheet ratios that can affect business credit. 4. In the long run, you usually pay more than if you could have obtained the equipment with a capital lease or a loan, but in the short-run (when you are cashed pinched) it can be a
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Unformatted text preview: life saver. Capital Leases 1. Capital leases are used for long-term leases and for items that do not become technologically obsolete, such as many kinds of machinery. 2. In capital leases the equipment buyer is essentially making payments to own whatever equipment is being leased. At the end of the term, you will usually pay an established nominal amount (like $1) to obtain ownership of the equipment. This gives the lessee (the person who is leasing) the benefits and drawbacks of ownership, so they are considered as assets, and they may be depreciated. 3. For accounting purposes, you must capitalize the lease on the balance sheet (ergo capital lease). It will affect your long-term liabilities and assets such as bank loan would. Thus these leases are considered as debts of the lessee and revenue for the lessor. 4. Despite that it is capitalized like a typical term loan, capital leases are usually easier to obtain and consume less initial capital than a typical bank term loan....
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