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CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding

Which statement correctly distinguishes hire purchase from a lease?

In hire purchase, ownership passes to the hirer when the last instalment is paid, and the hirer is treated as owner for claiming depreciation. In a lease, title remains with the lessor and the lessee only pays rentals. The other statements reverse these positions.

  1. AIn hire purchase the hirer becomes owner on payment of the last instalment, whereas in a lease the lessee does not acquire ownership merely by paying rentalsCorrect
  2. BIn hire purchase the owner retains title permanently, whereas in a lease title passes to the lessee after the last rental
  3. CUnder hire purchase the hirer cannot claim depreciation on the asset, whereas a lessee can
  4. DHire purchase is available only for immovable property, whereas leasing applies only to movable assets

Explanation

Under a hire purchase agreement the hirer has an option to buy, and ownership passes upon payment of the final instalment. In a lease, title stays with the lessor. The tax benefits also differ: the hirer, as the effective owner, claims depreciation and interest, while the lessee claims rentals as expense.

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