A lease is an arrangement under which a lessor agrees to allow a lessee to control the use of identified property, plant, or equipment for a stated period of time in exchange for one or more payments. There are several types of lease designations, which differ if an entity is the lessee or the lessor. The choices for a lessee are that a lease can be designated as either a finance lease or an operating lease.
Respond to the following in a minimum of 175 words:
Discuss three different types of business leases and the merit of each one
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Types of Business Leases
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Types of Business Leases
One way in which a company can obtain the use of a property or equipment is outright purchase or to lease them. Leasing occurs in various forms and the most common ones are capital leases, operating leases, and sales-leaseback arrangements.
Capital leases occur where a licensed lessor purchases an asset on behalf of the lessee in return for contractual payments with interest. The ownership of the asset remains with the lessor while the lessee enjoys its use with an option to buy upon expiry of the contract (Brigham & Houston, 2012). The risks and costs associated with the use of the leased asset are usually borne by the lessee. The major merits of the financial leases is that they provide 100% financing, better utilization of the funds of a firm, tax-based benefits, and expeditious use of the asset.
Operating leases are form of financial leases but in this case, the lessor does not transfer all the rewards and risks associated with the asset. The lessor provides for other services attached with the asset such as maintenance, technical advice, and repairs. This type of lease is common in the use of assets such as computers, trucks, office equipment, and automobiles (Khan & Jain, 2007). The major merits associated with operating leases are that it provides increased flexibility in replacing of equipment, it removes the risks of obsolescence, and lease payments are tax-deductible. The sales-leaseback arrangements are forms of leases that result when the lessor buys then sales and leases back an asset for specific period under agreed terms (Shim, Siegel & Shim, 2013). Brigham and Houston (2012) points out that this form of leasing is alternative to taking a mortgage loan. The major merits associated wit………………………………………………………………………………………………
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