What is the difference between an operating lease and a financial lease?

Jump to Solution
Category:

What is the difference between an operating lease and a financial lease?

0
0

What is the difference between an operating lease and a financial lease?

Explanation & AnswerSolution by a verified expert

Explanation

Under the financial lease agreement, the ownership of the asset is transferred from the lessor to the lessee at the end of the lease term whereas under the operating lease agreement, ownership of the asset is not transferred to the lessee and it is returned back to the lessor at the end of lease term.
 
Moreover, the lessee has to incur the administration and maintenance costs of the assets in a financial lease whereas the administration and maintenance costs are borne by the lessor in the operating lease.
 
Further, the financial lease covers a major part of the economic life of the leased asset whereas the operating lease agreement ends much before the economic life of an asset and the lessor can lease the asset to another lessee.
 
The operating lease contains a cancellation clause, so it can be cancelled anytime during the lease term at the will of the lessee whereas there is no such cancellation clause in the financial lease agreement.
 
Moreover, in financial lease, the present value of lease payments are such that the cost of the asset can be recovered whereas, the lease payments are not sufficient enough to recover the entire cost of the asset in an operating lease and lessor can cover the cost by leasing it to another lessee.

Verified Answer

A financial lease is an agreement where the lessee is allowed to use the asset during the agreement and is given the ownership of the asset by the end of the lease term. On the other hand, the operating lease allows the lessee to use the lessor's asset during the agreement without transferring the ownership of the asset at the end of the lease term.
 
Moreover, the lessee has to incur the required costs of the assets during the lease term in a financial lease whereas costs of asset during the lease term are borne by the lessor in the operating lease.
 
Further, the financial lease covers a major part of the economic life of the leased asset whereas the operating lease agreement ends much before the economic life of the leased asset.
 
The operating lease contains a cancellation clause in the lease term whereas financing lease does not contain a cancellation clause in the lease term.
 
In financial lease, the present value of lease payments are such that the cost of the asset can be recovered whereas, the lease payments are not sufficient enough to recover the entire cost of the asset in an operating lease.

Purchase this answer to view it. $5
Login/Sign up for free, load your wallet instantly using PayPal or cards and purchase this solution to view it.

Looking for the solution to this or another homework question?

If you need essay writing assistance or homework solutions, log in or sign up for a free account and ask our writers any homework question.