A capital lease is essentially the same thing as a sale of
an expensive item financed by the seller, only instead of the note payable (promissory
note), the buyer (the lessee) signs the long-term lease contract.
Such an agreement stipulates that in which the lessor only
finances the lease, and all other rights of ownership transfer to the lessee,
resulting in the recording of the asset as the lessee's property in its general
ledger. This property shows up in Capital Lease account on the balance sheet of
the lessee.
The lessee can only record the interest portion of a capital
lease payment as expense, as opposed to the amount of the entire lease payment
in the case of an operational lease. The latter, however, needs to be disclosed
in the footnotes to financial statements anyway (I will cover operating leases
in the section of Off Balance Sheet
Financing).
Therefore, the only issue regarding capital leases is the
choice between structuring the purchase as a straight purchase or a capital
lease. Which means that you will have to build a financial model for each
option and choose the one that yields higher NPV and IRR values.
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