Bradley Co. is expanding its operations and is in the processof selecting the method of financing this program.After some investigation, the company determines that itmay (1) issue bonds and with the proceeds purchase theneeded assets or (2) lease the assets on a long-term basis.Without knowing the comparative costs involved,answer these questions:(a) What might be the advantages of leasing the assetsinstead of owning them?(b) What might be the disadvantages of leasing the assetsinstead of owning them?(c) In what way will the balance sheet be differently affectedby leasing the assets as opposed to issuingbonds and purchasing the assets?

Question
Asked Jan 10, 2020
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Bradley Co. is expanding its operations and is in the process
of selecting the method of financing this program.
After some investigation, the company determines that it
may (1) issue bonds and with the proceeds purchase the
needed assets or (2) lease the assets on a long-term basis.
Without knowing the comparative costs involved,
answer these questions:
(a) What might be the advantages of leasing the assets
instead of owning them?
(b) What might be the disadvantages of leasing the assets
instead of owning them?
(c) In what way will the balance sheet be differently affected
by leasing the assets as opposed to issuing
bonds and purchasing the assets?

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Expert Answer

Step 1

a. Advantage of leasing:

  • Leasing has a tax advantage that helps to write off the value of the asset as a whole.
  • Leasing is a flexible agreement which can be completed or renewed according to the requirement of the asset.
  • The risk of obsolescence is not borne by the lessee and the lessee has an option to upgrade the technology when the business demands it.
  • The lessee has an option to adapt to business changes with minimum cost of investment.
Step 2

b. Disadvantage of leasing:

  • The lessee is not the owner of the asset and he just has the right to use the asset. In some business situations, owing an asset may support the business.
  • Interest for lease financing are generally higher as the financial institutions are providing 100% or full finance for the agreement and the level o...

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