Question

Be sure to provide clear examples and data that supports your position.

The following topics must be included:

3. Costs and Benefits of Leasing

4. Residual Value of Leased Asset

Answer 1

cost and benefits of leasing

Lease is an arrangement between Lessor (owner of the Asset) and lessee (User of the asset) lessee will pay the periodical payment for that such usage

Basically Leases are Two Types

1.Finance Lease : Asset is taken on lease for a period of more than 12 months and subject to satisfaction of conditions called Finance Lease

2. Operating Lease : Operating Lease is the lease which is not a Finance Lease.

Leasing allows use the asset and pay for that use on Monthly/ annual basis.

Costs of Leasing: (Lessee point of view)

Lease rentals

No Ownership will carry if lease period expired.

Lessee can not claim Depreciation if it is finance lease

Maintenance will be high

Benefits of Leasing (Lessee Point of view)

Low Capital Expenditure

Asset can be used maximum life of the asset

No risk of obsolescence

Production value will get reduced due to leasing

Will get tax benefits

Fulfills the working capital requirement

Easy arrangement

4. Residual value of Leased Assets

Residual value is the estimated of a fixed asset at the end of its lease / end of its useful life. The lessor uses residual value as one of its primary methods for determining how much the lessee pays in the lease payments

A residual value is a guarantee made to the lessor that the value of an underlying asset will be at a specified amount at the end of lease period.

Ex: Mr. A has entered into lease contract with Mr.B to lease the asset and lease period is 10 Years. in addition Mr.A agree to pay Rs. 1000/- after lease period to Mr. B.

Mr. B can give it to Mr. A if the fair value at the time end of the lease period less the residual value . then it is beneficial to the lessor.

Lease Asset Value is Rs. 10000/- and lease period is 5 Years then Value of lease payment every year is Rs. 2000/- after lease period if asset want to sold third party Rs. 1000/- called residual value.