LEASING

Leasing



Lease is a contract whereby the lessor agrees to grant the use or enjoyment of an asset to the lessee, either physical or moral person, forcing the latter to pay a regular income to cover the original value of the property, the financial burden, and additional expenses under the contract. In this paper we aim to understand and discuss the leasing of vehicles, accounting treatment of leasing, difference between financial lease and operating lease, residual value of assets and executor cost (Wesley, 2002).

Vehicle leasing

Leasing a vehicle is a process in which a consumer pays for the right to drive a new vehicle for a set length of time without actually purchasing it. A lease is a contract that grants an individual the right to use a certain piece of property for a specific duration in exchange for a regular fee. The individual or entity that owns the property is known as a lessor, while the person paying for the right to borrow the property is the lessee. Vehicle leases require monthly payments, and they typically span a period of 24 to 48 months. In some cases, a consumer has the right to purchase the vehicle outright at the end of the lease agreement (Anonymous, 2001).

A monthly vehicle lease payment is made up of two main parts: the depreciation cost and the finance charge. Depreciation refers to the value the car loses over time. All cars, whether owned, leased, or rented for a short period, are subject to depreciation. In the case of a leased car, the dollar value of the depreciation is the difference between the new vehicle's initial value, or price tag, and its projected value at the time the lease expires, also known as the residual value. The amount of the monthly payments, therefore, is based on the estimated depreciation of the car over the duration of the contract. For example, a consumer wishes to lease a car valued at $20,000 for a period of 48 months. Both parties (the lessor and lessee) agree that, at the end of the period, the car's value will have decreased to $11,600. The depreciation value of the car will be $8,400. Therefore, over the 48-month period of the lease agreement, the consumer will make monthly depreciation payments of $175 ($8,400 divided by 48 months). In essence, the consumer is paying only for the amount of value he or she is using, rather than the car's full value (Fisherman. 2004).

The second part of the lease payment, the finance charge, is an additional fee a lessee pays for the right to drive the car. It is calculated as a percentage of the money that the lessor has invested in the car while the lessee drives it and is similar to the interest paid on a loan. The finance charge on an automobile lease is also known as the lease factor or money factor (Wesley, 2002).

Difference Between operational leasing and capital leasing

Capital leasing

Means leasing, contract whereby the lessor provides the use and enjoyment ...