1. Leases and financial statements A lease is an agreement that allows one party to use another party's property, plant, or equipment. Leases have become an important source for financing fixed assets for businesses and consumers. In a lease agreement, the uses the leased assets, which are owned by the Lease agreements can take several forms depending on the needs of the lessee and lessor. Classify the types of leases described in the following table. Financial Operating Lease Lease Sale and Leaseback A key characteristic in this type of lease agreement is that the asset is new and the lessor buys it from a manufacturer or distributor. The lessor maintains and finances the asset, but the lease payments are not fully amortized. This means that the payment received from the lease agreement does not always cover the asset's full cost. The owner sells the asset and leases it again from the buyer on a long-term basis and continues to use the asset but no longer owns it. Leasing is often referred to as off-balance-sheet financing because the assets and capital needed to acquire fixed assets do not always show up on the balance sheet. Suppose a firm needs to issue new debt to finance new fixed assets. The firm's operating and financial leverage would both increase. Leasing can hide this effect from the balance sheet. Which type of lease requires firms to capitalize the lease? Operating lease Financial lease Different companies or individuals offer different terms for lease contracts. An example of one such lease contract follows. Hewlett-Packard (HP) offers a lease program for its laser printers and PCs. The lease provides a 36-month contract with a $0 down payment at $279 per month for the laser printer. The lease payments fully amortize the printer's cost, and the lease covers maintenance costs. It also contains a cancellation clause if the lessee decided to terminate the contract Identify the type of lease described in the preceding example. Synthetic lease Combination lease 1. Leases and financial statements A lease is an agreement that allows one party to use another party's property, plant, or equipment. Leases have become an important source for financing fixed assets for businesses and consumers. In a lease agreement, the uses the leased assets, which are owned by the Lease agreements can take several forms depending on the needs of the lessee and lessor. Classify the types of leases described in the following table. Financial Operating Lease Lease Sale and Leaseback A key characteristic in this type of lease agreement is that the asset is new and the lessor buys it from a manufacturer or distributor. The lessor maintains and finances the asset, but the lease payments are not fully amortized. This means that the payment received from the lease agreement does not always cover the asset's full cost. The owner sells the asset and leases it again from the buyer on a long-term basis and continues to use the asset but no longer owns it. Leasing is often referred to as off-balance-sheet financing because the assets and capital needed to acquire fixed assets do not always show up on the balance sheet. Suppose a firm needs to issue new debt to finance new fixed assets. The firm's operating and financial leverage would both increase. Leasing can hide this effect from the balance sheet. Which type of lease requires firms to capitalize the lease? Operating lease Financial lease Different companies or individuals offer different terms for lease contracts. An example of one such lease contract follows. Hewlett-Packard (HP) offers a lease program for its laser printers and PCs. The lease provides a 36-month contract with a $0 down payment at $279 per month for the laser printer. The lease payments fully amortize the printer's cost, and the lease covers maintenance costs. It also contains a cancellation clause if the lessee decided to terminate the contract Identify the type of lease described in the preceding example. Synthetic lease Combination lease