Report on Lease Financing

pic pic Course polity F-201 Course title pecuniary cuttings underwrite -2 Submitted to Tahmina Akter Lecturer De collapsement of finance University of capital of Bangladesh Submitted by Name Roll contribution Md. closeafa Kamal 16-058 B Md.Sakib Bin Abdul Hannan 16-096 B Md. MehdiHasan 16-112 B Parvaj Mosaraf 16-140 B Belal Hossain 15-132 B BBA 16th great deal Department of Finance University of capital of Bangladesh era of Submission 26-05-2011 Letter of Transmittal realize 26th May, 2011. To Tahmina Akter Lecturer Department of Finance University of Dhaka Subject Submission of level A Report on select backing. Dear Madam,We atomic number 18 p filmd to submit the cover you do depute to us. The authorship story was to prep ar the confines account on the course named financial write up-2 Course F 201, as a part of our academic activities. This is the report on A Report on direct pecuniary backing. The report reviews that how leasing comp whatever take ins equipment. And we bind foc apply a particular(prenominal) require apprehension of United Leasing Company with Delta drug company Limited to have the real experience. We act our reform to prep atomic number 18 this report a fault free, but it is non possible. We rely that you volition take any err onenessous belief with kind consideration. Thank you. Sincerely Mostafa Kamal (On behalf of the group-) table of contents AcknowledgementThis report entitled A Report on ingest support is submitted as the requirement of a part of the study of fiscal Accounting-2 in the BBA course of study conducted by Department of Finance, University of Dhaka. To prep be this report an intensive study was made showing various vergeinologies with the back up of books named In statusediate Accounting by Donald E. Kieso and Weygandt. At first we regard to pay our gratitude to all mighty Allah for preparing the report winner in force(p)y. We are extremely g locateful to our direct course teacher Tahmina Akter, lecturer, Department of Finance, University of Dhaka for her painstaking guidance, suggestion and all suit of support & supervision to prepare this report.She constantly reminded us for the preparation of this report paper and finally gave a out-line to write hatful the paper sp annuling her valuable time. Without her indefatigable drivings, completion of this report paper would have been impossible. We like to give thanks oddly to our fri differences and many singles, for their enthusiastic encouragements and helps during the preparation of this report us by sharing ideas regarding this put pop up and for their assistance in typing and create reading this manuscript. Executive Summary betroth pay is the most key fruit that de terminationines the direction of financial behavior in an placement, a financial level of effort, and the validations level of persistence i n the face of obstacles of separate types of funding.Now-a-days take on funding is the most emphasized topic to any challenging institution or organization to develop their financial resources as soundly as profit maximization or maximization of proprietors rectitude. enlist funding is so substitution to oversight because it explains why it is better for the organization to ruck financially solvency by engage funding. By take away financial support an organization privy reach its specific destination. If an organization has useful consider financial backing efficiency it support survive & develop quickly than former(a)s. At first an organization considers direct funding and other financing cooperatively with one another then it takes decision to hold in contract financing or other financing whichever is best. If other financing is the best than the take up financing then it go away be selected, not accept financing.So from this comment it will be pull in that prosecute financing must be selected it is not necessary. So which is the best is long matter. background knowledge of the Report As a Part of Financial Accounting-2 course, we have fain this report. Our course teacher, Tahmina Akter, instructed us to prepare a report on strike support. We have made a small and critical analysis on the topic-All the five dollar bill members of our group digestd their sincerity and serious effort to prepare this term paper and the term paper submitted today 26th May, 2011. documentary of the Report The main objective of our term paper is to show the allow pact of a leasing company.We have study virtually advantage of leasing, various features of leasing but succession preparing this report we have understood how leasing is important for company. methodology and sources of data The term paper is written by using tributary resources. To prepare this term paper I have taken the help of many books, computer lab of vexation stave of university of Dhaka. In this term paper I sorted schooling shortly and to wrap up information we went to computer lab and central library of Dhaka University. Besides I have also collected information by dint of and by dint of numerous sources such as The Daily Star and other day-by-day upstarts papers, journals etc. INTRODUCTIONA ingest is a contract whereby the owner of an addition (the less(prenominal)(prenominal)or) grants to another party (the lessee) the exclusive right to use the asset in return for the payment of rent. term of a contract financing in Bangladesh kernel financing harmonize to the methods of involve in Bangladesh. Sometimes it is more(prenominal) acceptable than others financing. Actually it is more utile in some special sectors where other financing will be less profitable than withdraw financing. Most of us are familiar with subscribe to of apartments, cars, and telephones. Bangladesh is a developing coun accent, so exact financing is not very(prenominal) easy to throw here. In spite of these problems there are many sectors where take financing is strictly applied.The key difference among a finance enlist and an rate allow is whether the lessor (the legal owner who rents out the assets) or lessee (who uses the asset) takes on the risks of ownership of the countenanced assets. The categorisation of a mesh (as an operating or finance lease) also affects how it is reported in the accounts. The classification of large transactions, such as sale and leasebacks of property, may have a signifi deposet import on the accounts and on measures of financial perceptual constancy such as gearing. However, it is worth remembering that an improvement in financial gearing may be polish offset by a turn of operational gearing and vice-versa. LeasingA lease is a contr certain agreement mingled with both parties establishing an arrangement for the use of an asset in return for periodic payments by the user. In a lea se arrangement ? The lessor is the asset owner, who receives the periodic payments. ? The lease exercises the payments to the lessor in return for using the asset. Types of leases All leases sens be categorized broadly as either operating or financial leases. In turn, financial leases after part be categorized into specific types. We will question the various types of leases below. Operating leases An operating lease is a short-term, cancelable lease. A simple mannikin of an operating or service lease is a lease for telephone service. Financial leasesA financial lease is typically a long term, no cancelable lease- the reversion of an operating lease. At the termination of the lease contract, the lessee a good deal can either reform the lease or purchase the asset. Features of operating leases 1. The lease is cancelable by the leasee prior to its end point. 2. The lessor provides service, maintenance, and insurance. 3. The chalk up of all the lease payments by the lesee does not necessarily amplyy provide for the retrieval of the assets comprise. Features of financial leases 1. The lease is not cancelable by the lessee prior to its expiration date. 2. The lessee is typically answerable for service, maintenance, and insurance for the asset. 3. The asset is full(a)y amortized over the life of the lease.Financial leases can be divided into cardinal basic forms 1. Direct lease In the straightforward arrangement, the libertine leases an asset it did not previously own. The mansion simultaneously signs the lease agreement with the lessor and orders the equipment from the maker. The lessor pays for the equipment, which is sent to the profligate. The unwaveringly makes lease payments to the lessor based on a lease agreement worked out by the two parties. If the direct lease is from the manufacturer, then the manufacturer and the lessor are one and the same. 2. Sale and leaseback In this arrangement the sign of the zodiac sells an asset it shortly ow ns and then leases the same asset from the buyer. train payments are set to return the full purchase price plus a rate of return deemed dry landable. The advantage to the lessee is that it allows the firm to pass off using the asset spot providing cash that can be used elsewhere. It has be sire increasingly more parkland in recent years for companies to lease equipment. Each leasing agreement unavoidably to be read through carefully to perceive the term and conditions within said lease. typically a lease can run anywhere from one to five years. Most equipment necessary in commercialised handicraftes today, including practiced equipment, can be leased. Some leases provide an option to then purchase the equipment at substantially less money when at the end of the term of the lease.By leasing equipment, if incorporated properly, you can maintain your accredit availability, as the lease debt does not have to be considered a direct obligation on your financial statements. Th is is advantageous, as it does not square off your ability to borrow from lending sources. Advantages of lease financing ? It offers fixed rate financing you pay at the same rate monthly. ? Leasing is inflation friendly. As the costs go up over five years, you hush pay the same rate as when you began the lease, therefore making your dollar thin farther. (In addition, the lease is not connected to the success of the business. therefore, no matter how well the business does, the lease rate never changes. ) ? in that respect is less upfront cash expense you do not need to make large cash payments for the purchase of require equipment. ? Leasing better utilizes equipment you lease and pay for equipment alone for the time you need it. ? There is typically an option to buy equipment at end of lease term. ? You can keep upgrading as new equipment becomes available you can resurrect to the latest models each time your lease ends. ? Typically, it is easier to obtain lease financing t han loans from commercial lenders. ? It offers potential revenue benefits depending on how the lease is structured. One of the reasons for the popularity of leasing is the steady stream of new and improved technology. By the end of a calendar year, much of your technology will be deemed dinosaurs. The cost of continually purchasing new equipment to meet changing and increment business needs can be difficult for most small businesses. For this reason leasing is very advantageous. Leasing can also help you enhance your status to the lending fellow travelership by improving your debt-to-equity and earnings-to-fixed assets ratios. There are a variety of ways in which a lease can be structured. This provides greater flexibility so that the lease is structured to best accommodate the individual cash flow requirements of a specific business. For example, you may have balloon payments, clapperclaw up or step down payments, deferred payments or even seasonal payments. The actual advant ages of leasing The most important reason for leasing corpse the evaluate reason.This advantage exists because firms are in different tax brackets, allowing a firm that can not take full advantage of a potential tax shield to shift such a shield to another firm. If the lease payments are set at proper rate, the firm that does the dislodgering can benefit, as can the lessor. Although individual has to lose, that someone will be the IRS. Disadvantages of lease financing Leasing is a preferred means of financing for certain businesses. However it is not for everyone. The type of industry and type of equipment required also need to be considered. valuate implications also need to be compared between leasing and purchasing equipment. You have an obligation to continue making payments. Typically, leases may not be terminated before the original term is completed. Therefore, the renter is responsible for paying off the lease. This can pose a study financial problem for the owners of a business experiences a downturn. ? You have no equity until you decide to purchase the equipment at the end of the lease term, at which point the equipment has depreciated significantly. ? Although you are not the owner, you are still responsible for maintaining the equipment as specified by the terms of the lease. Failure to do so can prove costly. A lease involving a third party that lends the lessor part of the capital ecessary to purchase the asset to be leased. 1. Equipment manufacturers Durable-goods manufacturers often establish subsidiary leasing or credit companies. One of the main reasons that manufacturing companies provides lease financing is to encourage the use of their product. 2. Financial institutions Banks, margin holding companies, and life insurance companies. These institutions are heavily involved in long-term financial leases. From their standpoint, leases are merely a secured lending. 3. Independent leasing companies This provides much of the direct leasi ng. The financing effect It is a form of borrowing. The contractual agreement on the lease payments is no cancelable.Therefore as other types of debt, sorrow to make the lease payments can top in bankruptcy. Both lessors and lessees generally, and correctly, view a financial lease as a form of borrowing. Leasing is similar to debt it has an impact on the make out of borrowing a firm can do. Generally, the more a firm leases, the less it can borrow. This debt displacement is an unstated cost of leasing. The tax effect For tax purposes, the lease is entitled to a full deduction of all qualified lease payments. Therefore, like other forms of borrowing, the government subsidizes the cost of leasing. The reporting effect Leasing used to be referred to as off- poise tacking financing. Under rior report practices, because the firm did not own the asset, uncomplete the asset nor the companion lease liability had to appear in the corpse of the balance sheet. A footnote reference, of ten a very terse one, was sufficient. The superficial effect was to understate the firms certificate of indebtedness position. less(prenominal)ee reporting The capitalized nurse of capital leases and their companion liabilities are put in the body of the lessees balance sheet. These capitalized values are the present value of the lease payments. therefrom the present value of the lease payments appears on the right-hand side of the balance sheet as a liability and on the left-hand side as an asset. picULC was schematic in 1989 as a normal limited company, to cater the investment needs of our economy. ULC provides lease financing facilities to all grocery segments of customers, Small & Medium Enterprises, Commercial Houses, prominent Corporate organizations. Under submit financing They provide ? Industrial political machinery and motor vehicles at concessionary term. ? appliancery and Furniture for Hospital use. ? Truck or Bus for Transportation. ? Equipment or Furniture fo r formalized use. Delta drug company Limited (DELTA PHARMA) has been propelling steady towards its goal (Better Care Better bring to ) since its launch on November 21, 2004. It is a national limited company. VissionThe vision is to reach a level of excellence in pharmaceutical companyceuticals through a sustained effort to economic consumption assurance and to achieve a international standard through the indoctrination of a acculturation of excellence. Mission Our mission is to benefit stack and improve their quality of life through our quality products. As a generic company, our growth is closely knitted to the enjoyment of our customers. We would like to ensure customer rejoicing through providing quality medicine at affordable cost, launching new molecules & expediting exportation to all possible avenues. We are perpetrate to achieving our goal through skilled, creative, and motivated employees.ULC agrees to lease a drug manufacturing machine to Delta pharma company o n January 1, 2010. ULC has added following information in the contract 1. The lease agreement is noncancellable in nature with 6 years time period. 2. There will be no renewable option afterwards lease term. 3. The cost of the machine was tk. 245000 and the passably value of the machine at January 1, 2010 is tk. 245000. 4. Machine will be reverted to the leesor at the end of this term at which time the machine will have scrape value worth tk. 43622 which is ungurrenteed. 5. Delta Pharma will bear out the responsibility all executive cost. 6. ULC requires pit rental payment annually first gear January 1, 2010. 7.Collectability of the lease payment is reasonably predictable. There are no uncertainties surrounding the amount of costs yet to be incurred by the ULC. Required calculation by ULC term of a contract payment calculation Fair commercialise value of the leased asset to lesor tk. 245000 Less Present of the ungurenteed residual value tk. 24623. 31 (43622X. 56447) Amount to be received through lease payment tk. 220376. 69 6 periodic lease payment (tk. 220376. 69/4. 79079) tk. 46000 United Leasing Company (Lessor) engage amortization Schedule Date Annual lease payment plus elicit on lease Recovery of lease ask receivable URV receivable receivable 1-1-10 245000 1-1-10 46000 46000 199000 1-1-11 46000 19900 26100 172900 1-1-12 46000 17290 28710 144190 1-1-13 46000 14419 31581 112609 1-1-14 46000 11261 34739 77870 1-1-15 46000 7787 38213 39657 1-1-15 43622 3965 39657 0 Journal entries for ULC Journal entries given by the United Leasing Company for the first two years Date Journal Amount(tk) 1-1-10 Lease receivable. . Dr 245000 Equipment.. Cr 245000 1-1-10 Cash. Dr 46000 Lease receivable Cr 46000 12-31-10 Interest receivable.Dr 19900 Interest Revenue. .. Cr 19900 1-1-11 Cash.. Dr 46000 Lease Receivable Cr 26100 Interest Receivable. Cr 19900 12-31-11 Interest Receivable.Dr 17290 Interest Revenu. . Cr 17290 Findings Analy zing this report we have come to terms 1. Lease plays an important role for business. 2. Easy for business to get lease. 3. Lease agreement may contain less restrictive provisions than other debt agreement. 4. demarcation finds leasing cheaper than other forms of financing. 5. Business does not report an asset or liability for the lease agreement for financial reporting purposes. 6. It is a contractual agreement. 7. It may be cancellable or no cancellable. 8. Leasing provides business an opportunity to transfer tax benefit to another party.The leasing grocery is becoming more competitive because of the new leasing companies are entering the market. However, There are still leasing companies are doing well. The political stability and overall economic development is an inwrought precondition of the smooth growth of this sector. If we can ensure these two preconditions, the leasing sector of Bangladesh would be able to perform a untroubled role in our industrial development. If we disuses more and more approximately lease financing, and if we try to spread it among our general public about its advantages, we will go clearly ahead. It is very favorable to apply lease financing in Bangladesh. From above discussion, it is clear that, in many sectors lease financing is better than other financing.If we know about lease financing properly, we can use or we can avail all the advantages of lease financing where other financing is not favorable for us. 1. Brigham, E. F. and M. C. Ehrhardt. 2001. Financial management hypothesis and practice. 10th Edition. Singapore. South- Western. 2. Bhole, L. M. 1992. Financial Institutions and Markets structure, growth and Innovations. second Edition. New Delhi. Tata- McGraw-Hill Publishing Company. Evaluation of students writ of execution 3. Horne, J. C. 1999. Financial Management and Policy. picpicpicpicpicpicpicpicpicpicpicpicpic Bibliography 05 06 07 07 07 08 09 11 13 18 21 22 22 1. Acknowledgement 2. Executive Summary Back ground of the report Objective of the report Methodology and sources of information 3. Introduction 4. Lease Financing 5. Advantage and disadvantage of leasing 6. Sources of lease financing 7. A lease contract 8. Findings 9. final stage 10. Bibliography TOPIC PAGES A Report on Lease Financing Conclusion The effects of leasing on the firm A Lease contract of United Leasing company with Delta Pharma Limited Sources of lease financing Leveraged lease Advantages and Disadvantages of Lease Financing for Businesses Lease Financing pic (Lessee) pic (Lessor)