Question

Fancy Bhd intends to open a factory to produce a range of children toys. The management of the company is deciding on whether to enter into a building leasing contract with Game Bhd (which owns a suitable building that can be turned into a factory building) or to buy the factory building outright from Game Bhd.

1. Describe a type of leasing contract that is suitable to accommodate the need of Fancy Bhd.

2. Outline two (2) advantages and two (2) disadvantages of the leasing contract that you have selected in the case of Fancy Bhd over the option of buying the factory building directly from Game Bhd.

Answer 1

1.

As we always assume to run business as going concern. It is better to take the building on Finance Lease.

Finance Lease a type of lease in which the lessor is the owner of the asset till lease period but lessee has full control over the asset.

In this, lessee pay a lease payment each year to lessor and at the end of lease period, the title of the asset is transferred to the lessee i.e., lessee will become the owner of the asset.

In the given case, Fancy Bhd. wants to start a factory, so finance lease will be a better option.

2.

Advantages:

a. The cost of asset is paid over a periodic payment instead of a large one time which gives liquidity in business.

b. Cost is paid over a period of time with fixed installments that will not increase with increase in interest rate of banks.

Disadvantages:

a. Asset can be repossessed by the lessor, in case of non payment of lease amount.

b. You are not owning the asset and thus all major rights relating to asset lies with the lessor.

I hope it will help you in the study.

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