Duties of Lessee - Guaranteed Residual value
In a lease agreement, the user of the asset is known as the lessee. The lessee is responsible for fulfilling certain obligations toward the lessor, who is the owner of the asset. The lessee’s main responsibilities include: (a) paying the lease rent as agreed upon, both in terms of amount and timing; (b) paying for the purchase option if the purchase price is significantly lower than the asset’s fair value when the option becomes exercisable; and (c) returning the asset in good condition, ensuring that it retains some value as guaranteed. This guaranteed value is often referred to as the Guaranteed Residual Value, a clause commonly found in finance leases.
If the value of the asset returned to the lessor is less than the guaranteed residual value, the lessee must cover the shortfall in addition to returning the asset. As a result, the lessee needs to be mindful of the asset's value at the end of the lease term. Therefore, the lessee should use the asset in a way that ensures its value does not fall below the guarantee they provided.
By CA L.Muralidharan and CPA L.Mukundan
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