Question
Finance and operating leases both have advantages and disadvantages. A finance lease is different from operating lease as they do not provide for maintenance service,
Finance and operating leases both have advantages and disadvantages. A finance lease is different from operating lease as they do not provide for maintenance service, you cannot cancel these leases, and they are fully amortized (Brigham & Ehrhardt, 2017). It is like a loan; the asset is treated as being owned by the lessee, so it stays on the balance sheet. Ownership of the asset might be transferred to the lessee at the end of the lease term. Lessee is the owner of the equipment and therefore claims depreciation expense and interest expense. As for an operating lease it provides both financing and maintenance. The lease is written for a period which is quite a bit shorter than the expected economic life of the asset (Brigham & Ehrhardt, 2017). Very similar to renting the payments are considered operational expenses and the asset which is leased stays off the balance sheet. Ownership is retained by the lessor during and after the lease term. Lessee is renting the equipment and therefore the lease payment is a rental expense. The finance lease would be considered to be riskier as the ownership is transferred to lessee and the lessee pays the maintenance, insurance, and taxes. True or false, please explain rationale?
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