Discuss and distinguish between operating leases and finance leases.

In a lease transaction, the lessee is the individual or group that pays for the property, and the lessor is the owner of said property. In an operating lease, the lessor is responsible for the maintenance and service of the leased asset. Operating leases have a short lifespan and end before the expected economic life of the asset is predicted to end. Lessors can utilize renewal payments, release the asset to another lessee, or sell the asset to recover the assets full cost because of the short lifespan. (Brigham & Ehrhardt, 2019, p. 781) A clause specific to operating leases is the cancelation clause, which allows the cancellation of the lease before the lease expires. I would be more likely to find an operating lease employed for a fleet of trucks because of the expected shorter lifespan and the possible chance that I might want to cancel the lease if my business changes. The shorter lifespan will also lead the lessor to utilize renewal payments since it would be difficult to pay for the assets full cost sufficiently. Finance leases are also known as capital leases. This type of lease has to meet specific criteria to be defined as a finance lease or capital lease. Only one of the following criteria have to be met to be classified as this type of lease. In a finance lease, the lessee receives ownership of the asset when the lease term expires, which can be purchased at less than the assets true market value, or a very low price. (Brigham & Ehrhardt, 2019, 780) The criteria also include when the lease life is more than 75% of the assets economic life or the present value of lease payments is greater than or equal to 90% of the assets fair value. (Brigham & Ehrhardt, 2019, p.780) Capital leases do not include maintenance service, cannot be canceled, and are completely amortized. This is unlike the operating lease, where the lessor is responsible for maintenance and service. This type of lease is also considered a net lease because the lessor must be paid in full and receives a net payment from the lessee paying property taxes and insurance. A type of financial lease that involves property between firms is a sale-and-leaseback agreement, which can be considered a substitute to a mortgage, except the property is not new nor bought from a manufacturer.