Textbook Notes (369,067)
Canada (162,366)
Finance (37)
MGFC10H3 (13)
Derek Chau (13)
Chapter 22

Chapter 22 Notes

2 Pages
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Department
Finance
Course Code
MGFC10H3
Professor
Derek Chau

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Chapter 22 Leasing Noteslesseeone who receives the use of assets under a leaselessorone who conveys the use of assets under a lease221 Types of LeasesThe Basicsleasecontractual arrangement to grant use of specific fixed assets for specified time in exchange for payment usually in form of rent operating lease is a ST cancellable arrangement whereas a financial or capital lease is a LT noncancellable agreementdirect leaselease under which a lessor buys equipment from a manufacturer and leases it to a lesseesalestype leasearrangement whereby a firm leases its own equipment thereby competing with independent leasing companyOperating Leasesoperating leaseperiod of contract is less than the life of the equipment and the lessor pay alls maintenance and servicing coststhis form of leasing has several important characteristics1Operating leases are usually not fully amortized This means that the payments required under the terms of the lease are not enough to recover the full cost of the asset for the lessor This occurs because the term or life of the operating lease is usually less than the economic life of the asset Thus the lessor must expect to recover the costs of the asset by renewing the lease or by selling the asset for its residual value2Operating leases usually require the lessor to maintain and insure the leased assets3The cancellation option gives the lessee the right to cancel the lease contract before the expiration date If the option to cancel is exercised the lessee must return the equipment to the lessor The value of a cancellation clause depends on whether future technological andor economic conditions are likely to make the value of the asset to the lessee less than the value of the future lease payments under the leaseFinancial Leasesfinancial leaselongterm noncancellable lease generally requiring the lessee to pay all maintenance coststhe characteristics of a financial lease are1Financial leases do not provide for maintenance or service by the lessor2Financial leases are fully amortized3The lessee usually has a right to renew the lease on expiration4Financial leases cannot be cancelled In other words the lessee must make all payments or face the risk of bankruptcysale and leasebackan arrangement whereby a firm sells its existing assets to a financial company which then leases them
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