Question

Respond to the following in a minimum of 175 words PLEASE TYPE RESPONSE:

Many individuals and companies choose to lease for the following advantages. Based on these can you tell me if you were a manager of a company which would you use and why?

1. Leasing reduces the upfront cash needed to use an asset.

The purchase of an asset can include several additional fees—loan origination fees, closing costs, brokerage fees, and certain taxes. You know that if you’ve ever bought a house or a car. Many leases, though, begin with the first lease payment including nothing more than the agreed-upon monthly amount. Relatedly, some companies, especially newer ones, might not have enough cash to pay the full purchase cost for an asset, but they likely have enough cash to begin monthly payments. Also, companies that have high credit risk may not be able to obtain financing to purchase an asset. Leasing might be these companies’ only option to acquire an asset.

2. Lease payments often are lower than installment payments.

Installment payments to buy an asset are based on the asset’s full fair value. On the other hand, lease payments often are tied only to the portion of the asset’s fair value expected to decline over the lease period. Because the lease period can be less than the asset’s full life, the monthly payments associated with leasing often are lower.

3. Leasing offers flexibility and a lower cost when disposing of the asset.

Returning a leased asset at the end of the lease term requires little effort or cost. When you’ve rented a car for the week, you simply return the car to the rental company. When a company is finished with an office building, the company simply moves out. However, selling an asset that you’ve previously purchased usually isn’t that easy. Some unique assets might not have an available market in which used items can be easily sold. Selling an asset also can require significant costs. For example, many realtors charge up to 6% to sell your home or office building.

4. Leasing might offer protection against the risk of declining asset values.

When a company buys an asset, the price it might eventually sell the asset for at the end of its productive life is uncertain. On the other hand, when a company leases an asset it avoids the risk of declining fair values (selling prices) but also misses out on any increase in fair value.

5. Leasing might offer tax advantages.

Sometimes leasing offers tax savings over outright purchases. For instance, a company with little or no taxable income—maybe a business just getting started, or one experiencing an economic downturn—will get little benefit from deducting depreciation on its tax return. Normally, depreciation reduces taxable income and thus reduces taxes, but if there’s little or no taxable income to reduce, there’s little or no tax savings. However, the company can benefit indirectly by leasing assets rather than buying. By allowing the lessor to retain ownership and thus benefit from depreciation deductions, the lessee often can negotiate lower lease payments. Lessees with sufficient taxable income to take advantage of the depreciation deductions, but still in lower tax brackets than lessors, also can achieve similar indirect tax benefits. '

Answer 1

Leasing

Leases are contracts in which the property/asset owner allows another party to use the property/asset in exchange for something, usually money or other assets(lease rentals). The two most common types of leases in accounting are operating and financing (capital lease) leases.This process of entering a lease contract is called leasing.

As a Manager of a Company I would choose to lease an asset because of the following advantages,

a. Balanced Cash Outflow

Burden of down payment will not be dere in leasing.Cash outflow or payments related to leasing are spread out over several years, hence saving the burden of one-time significant cash payment. This helps a business to maintain a steady cash-flow profile.

b.Quality Assets

In leasing ,we can use quality assets in in affordable and less expensive rights.While leasing an asset, the ownership of the asset still lies with the lessor whereas the lessee just pays the rental expense.

c.Tax benefit

Leasing expense or lease payments are considered as operating expenses, and hence, of interest, are tax deductible.

d.Off-balance sheet debt

Although lease expenses get the same treatment as that of interest expense, the lease itself is treated differently from debt. Leasing is classified as an off-balance sheet debt and doesn’t appear on the company's balance sheet .

e.Low Capital Expenditure.

Leasing will have less initial capital and lower capital expenditure.

f.No risk of Obsolescence

When a company leases an asset it avoids the risk of declining fair values (selling prices) but also misses out on any increase in fair value.