Class Activity Solution - Lessee Accounting

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Items Laptop for a Startup Tech Office Space for a High-End Camera Company Car for a Specialized
Company Growing Company for a Freelance Sales Team Manufacturing
- Lease Cost: R100 per - Lease Cost: R2 Photographer - Lease Cost: R300 Equipment for a
month for 3 years 000 per month for - Lease Cost: per month for 3 years Small Business
5 years R50 per month for - Lease Cost:
2 years R800 per month for
5 years
- Purchase Cost: R1 500 - Purchase Cost: - Purchase Cost: - Purchase Cost: R25
R500 000 R3 000 000 - Purchase Cost:
R50 000
Lease
Buy
Financial
implications
Business needs
and Flexibility
Risk and return

considerations
Long-term goals
and plans
ACTIVITY
1. For the laptop item, consider the financial implications and flexibility of both leasing and buying. What factors might influence
your decision, and how would this choice impact the company's cash flow?
2. The office space has a significant difference in lease cost compared to the purchase cost. How might the company's long-term
growth plans influence the lease or buy decision? What are the potential risks and benefits of each option?
3. In the case of the high-end camera for the freelance photographer, discuss the risks associated with leasing versus buying. How
might the lack of a purchase option impact the photographer's ability to upgrade equipment in the future?
4. For the company car item, analyze the risk and return considerations for leasing versus buying. What are the potential
advantages and disadvantages of each option regarding maintenance costs and resale value?
5. The specialized manufacturing equipment has a significant difference in lease cost compared to the purchase cost. Consider the
company's long-term goals and plans. How might leasing or buying affect the company's ability to invest in other areas of the
business?
6. In general, how might a company's financial situation and industry type influence the lease or buy decision for different assets?
SOLUTION
Question 1
Financial Implications
Leasing the laptop involves lower upfront costs and spreads the expense over time, which may be beneficial for a startup with
limited cash flow. Buying, on the other hand, requires a higher upfront investment but results in ownership of the asset.
Flexibility
Leasing offers the option to upgrade to newer laptops at the end of the lease term, allowing the company to stay up-to-date with
technology. Buying means the company owns the laptop outright and can use it as long as it remains functional.
Impact on cash flow

- Leasing: Lower initial cash outflow due to lower monthly payments, preserving cash for other essential business expenses.
- Buying: Higher initial cash outflow due to the purchase cost but no recurring lease payments after the purchase.
Question 2
Influence of long-term growth plans:
- If the company expects rapid growth or anticipates relocating in the future, leasing offers more flexibility to adjust office space
based on changing needs.
- Buying might be suitable for long-term stability and potential appreciation in property value.
Potential risks and benefits:

- Leasing: Lower upfront costs and predictable lease payments, but the company has no equity in the property and may face
increasing lease costs over time.
- Buying: Higher upfront costs, but the company gains ownership and potential property value appreciation. However, it also bears
the responsibility for maintenance and may face challenges selling the property if the business outgrows the space.
Question 3
Risks of leasing:
- Leasing may involve restrictive terms, such as penalties for early termination or exceeding usage limits, which could be costly for
the photographer.
- The lack of a purchase option means the photographer won't own the camera at the end of the lease, and upgrading might require
additional leasing costs or purchasing a new camera separately.
Question 4
Risk and return considerations:
- Leasing offers lower upfront costs and predictable monthly expenses, providing better cash flow management.
- Buying the car involves higher upfront costs, but the company owns the asset and can potentially benefit from any appreciation in
the car's value.
Advantages and disadvantages:

- Leasing: Lower maintenance costs, as the lessor may cover routine maintenance. However, there may be penalties for excessive
wear and tear.
- Buying: The company has full control over maintenance, but it is responsible for all repair and resale costs when the car is no
longer needed.
Question 5
Leasing and ability to invest:
- Leasing requires lower initial cash outlay, freeing up capital for investment in other areas of the business, such as marketing,
research, or expanding product lines.
- Buying involves a larger upfront investment, which may limit the company's immediate ability to invest in other areas.
- A company with strong financial stability and surplus cash may lean towards buying assets to gain ownership and long-term cost
benefits.
- Startups and companies with limited cash flow may prefer leasing, as it requires less initial investment and preserves capital for
essential operations.
- Industries with rapidly changing technology or equipment may opt for leasing to stay up-to-date and maintain a competitive edge.

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Risk and return

Impact on cash flow

Potential risks and benefits:

Advantages and disadvantages:

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