Business Studies · Financial Management
Case Situation: John Smith, the operations manager at ABC Ltd., has decided to acquire advanced machinery through a finance lease. The lease term is designed to closely align with the machinery's economic life. John is responsible for ensuring that the machinery is well-maintained and operational throughout the lease period. The lessor receives periodic payments to recover the asset's cost and interest, but John has the flexibility to negotiate the price and delivery schedule with the supplier. At the end of the lease term, John can either return the machinery or follow the terms outlined in the lease agreement. In a finance lease, which of the following is most accurate regarding the roles of the lessee and lessor?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The lessee does not bear the responsibility for maintenance and repair; rather, it is the lessor's obligation to manage all asset-related tasks during the lease period.
- 2The lessee can use the asset freely, but only the lessor has the authority to decide the repairs, maintenance, and disposal of the asset at the end of the lease period.
- 3The lessee is simply a temporary user of the asset and has no role in maintaining the asset, as the lessor retains full control over maintenance and usage.
- 4In a finance lease, the lessee assumes substantially all the risks and rewards incidental to ownership, taking responsibility for maintaining the asset throughout the lease term.✓
Correct answer
In a finance lease, the lessee assumes substantially all the risks and rewards incidental to ownership, taking responsibility for maintaining the asset throughout the lease term.
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