Question

Why would a company want to record a capital lease as an operating lease? Can you see any benefit as far as the financial statements?

Answer 1

First we have to know the meaning of two terms operating lease and finance lease or capital lease

Capital lease :- in this the lessee has an option to purchase the asset at the end of the lease period

lessee can claim interest and depreciation

all the expenses are to be borne by the leessee

the running and maintenance cost are also to be borne by the lessee.

Operating lease :-

No option of purchase of the asset.

The ownership is of the asset is at lessor

The advantages of the Operating lease than finance lease is as follows :-

1. All the amount paid to lessor can be claimed as expenses

2. All the assets taken under finance lease will form part of total assets in the organisation and this leads to over capitalisation of the company but in the operating lease there is no such problem.

3. All the risk of asset is at the lessor only so there is no burden on the lessee.

4. The lessee need not file any filings with appropriate authorities about the asset because the ownership of the asset is at lessor

5. The lease can use the entire life of the asset with out compulsion to buy the asset at the end of lease but in capital lease there is an option and based on situation the option may become compulsion.

These are all the information required to solve the given question.

I hope, all the above given details and information are useful and helpful to you.

Thank you.