Continental Airlines Case

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Brian Charboneau ACCT 720: Carpenter Continental Case Analysis A: Companies lease rather than buy assets because they make money from the assets and don't actually have to own them to do so. Companies can make profits from the assets and pay monthly rather than having to pay the full purchase price. This allows a company to keep more cash on hand for other investments and remain more liquid than if they had purchased the asset. B: An operating lease is a lease whose term is short compared to the useful life of an asset or piece of equipment being leased. Normally used to acquire equipment for a short period. A typical example is when a company leases an aircraft for 5 years when the economic life is 25 years plus. A capital lease is a lease of business equipment that represents ownership of the asset leased and is reflected on the balance sheet. A capital lease must meet several requirements. Firstly the lease term must be greater than 75% of the asset's estimated economic life. Secondly the lease contains an option to purchase the asset for substantially less than fair market value at the end of the lease term. Lastly the present value of the lease payments is greater than 90% of the fair makers value of the asset. An example of a capital lease is a company purchasing a piece of heavy equipment that they pay in installments and purchase at the end of the lease. A direct finance lease occurs when the lessor of an asset is not the maker or dealer, but purchases the item with the intent of leasing it. The lessor must show that the minimum lease payments can be collected and there are no uncertainties about the amount of reimbursable costs that will be incurred. An example of a direct finance lease is if a Company A leased computers from Company B that had the computers with the purpose of leasing them. A sales type lease is a lease where a company rents

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