Explain the potential benefits of leasing an asset rather th

Explain the potential benefits of leasing an asset rather than buying. Explain how the classification of a lease (operating or capital) may alter the transparency of information on the financial statements.

Solution

Benefit of leasing An assets:

Less initial Cost: The primary benefit is initial investment cost is very less than purchase asstes

Flexible terms: In lease more flexible terms than take loan for buying Assets

Tax Deductible: Leases expenses can be deduct as business expenses in tax return

Easy to upgrade:

A company should classify a lease transaction as a capital lease if lease is not cancelable and if one or more of the below four classifiaction criteria are met.

1) The agreement specifies the ownership of assest transfers to the lesse

2) the agreemnet contain the bargain purchase option.

3) the non canceable lease term is equal to 75 % or more of the expected economic life of the assets.

4) the present value of the minimum lease payment is equal to or greater than 90% of the fair value of assets.

If none of the above criteria are met, the lease can be classified as a operating lease.