25th Nov 2009 by Amelia Timbers
A capital lease is a lease for both the hard asset- the vehicle, factory etc, and a lease for some of the ownership rights. A capital lease allows its holder to both write off both depreciation (like an owned asset) and interest (like a debt). A capital lease can only be used in certain situations according to accounting rules, most of which include a promise to buy the asset at the end of the life of the lease, or if the lease is above market rate. In general, firms prefer operating leases or outright ownership rather than the hybrid option offered by a capital lease.
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