Question

In each of the following separate cases, indicate whether the company has entered into a finance lease or an operating lease. 1. The leased asset is highly customized for the lessee's operations and would be of no use to any other business. 2. The lease term is 5% of the leased asset's useful life and there is no option for the lessee to purchase the asset. 3. The lessor retains title to the asset, and the lease term is 3 years on an asset that has a 10-year useful life.

Answer 1

Answer:1). Finance lease. 2). Operating Lease. 3). Operating Lease

Explanation: A lease is contract by which one party conveys a property to another for a specified term. The two common types of Lease are Finance Lease and Operating lease.

A Finance Lease is a method of financing assets where the asset remains the property of the finance company that hires them and the lessee pays for the hire of the asset. Here, there is an option to purchase the asset.

An Operating Lease on the otherhand is a lease where the risk and return remains with the Lessor.