--%>
Assignment Help - homework help

Types of lease contracts

What are the types of lease contracts which are seen in practice?

E

Expert

Verified

Many types of lease contracts are seen in practice, some of popular ones are as follows:

Financial Lease: This type of lease contract extends over the whole useful life of an asset and it cannot be cancelled before the lease period expires. The legal ownership of the asset is although not transferred. In these types of lease the duration of the lease contract is almost equal to the useful life of the asset. Thus the whole investment is recovered by the lesser. In a Finance Lease the lessee may be given an option to purchase the asset at the expiration of the Lease period. In financial lease, the maintenance and other related expenses are normally borne by the lessee as well as the risk of obsolescence. The asset given on lease to lessee is of specialised nature and can only be used by the lessee without major modification.

Operating Lease: This type of lease is such in which the asset is leased for a short period. In an operating lease the contract is cancellable during the term of lease. The period of lease in such types of leases is shorter than the asset’s economic life. In other words, an operating lease is not a Finance Lease. In this type of lease a single lease covers a period which is shorter than the useful life of the asset and therefore the original cost of the asset cannot be recovered in a single lease. Here the risk of obsolescence remains with the lesser and he is also responsible for the insurance and other expenses. Since the period of the lease is shorter therefore the lease rentals will be greater. Such types of leases are preferred when the asset is likely to become obsolete within a short period.

The suitable lease option would be financing lease for Paulo’s restaurant since Paulo would be using the assets for a rather long period and also the assets are not prone to become obsolete within a short period.

   Related Questions in Corporate Finance

  • Q : What is Financial Analysis Financial

    Financial Analysis: It is the investigation and interpretation of financial statements and associated financial reports. Trained and certified accountants generally complete this kind of analysis. The role of a financial analyst is to

    		•
  • Q : Problem regarding purchasing machine

    Alger Corp needs to buy some construction equipment for $50,000 that has a helpful life of 4 years with no salvage value. The Alger utilizes straight-line depreciation. Alger contains a tax rate of 30%, and it employs a discount rate of 10%. The equipment will produce

    		•
  • Q : Does the equity of shareholders have

    Does the equity of shareholders represents the savings a company has accumulated by the years?

    		•
  • Q : Selling or purchasing problem Atlas

    Atlas Realty Company is interested in buying a house and renting it out for $12,000 a year, collecting the rent in advance each year. This will depreciate the house over 25 years; however sell it after 15 years at twice its purchase price. The maintenance expenditures

    		•
  • Q : Discretion can distort results Discuss

    Discuss how management’s discretion in applying accounting rules can mislead investors. Provide three examples and how the discretion can distort results?

    		•
  • Q : Why classical option pricing required

    Why classical option pricing with constant volatility required?

    		•
  • Q : Calculated betas when they give

    Calculated betas give different information if they are acquired by using weekly, monthly or daily data.

    		•
  • Q : Problem on sales collections The 2010

    The 2010 income statements of Leggett and Platt, inc. reports net sales of $4,076.1 million in 2010 and $4,250 million in 2009. The balance sheet reports accounts and other receivables, net of $550.5 million at December 31, 2010 and $640.2 million at December 31, 2009

    		•
  • Q : Tax credit for lease payments problem

    ABC Inc. is planning to lease a computer for $3000 per annum, payable in advance, for a period of 4 years. The lease will cover maintenance costs. ABC CFO feels that if he buys the same computer he should be able to sell it at 15% of the purchase price after 4 years.

    		•
  • Q : Problem on stock market John Wong is a

    John Wong is a fresh graduate and has a limited amount of funds for investments. He expects that the Hong Kong stock market will fall soon but he is not familiar with derivatives. In order to gain more money to buy a car, he explores engaging in Hang Seng Index (HSI)

    		•