Question

Winterton Rail Ltd. (Winterton) is considering obtaining some new locomotives. The purchase price of the locomotives is $59,724,975. Winterton is considering whether it should purchase the locomotives or lease them directly from the manufacturer. If Winterton buys the locomotives, it would borrow the full purchase price from a large institu tional lender and repay the loan by making an annual payment of $7,500,000 on the last day of each of the next 20 years. If Winterton leases the locomotives, it would make annual lease payments of $7,500,000 to the manufacturer on the last day of each of the next 20 years.

Required:
a. Prepare the journal entries Winterton would make if it borrowed the money and purchased the locomotives.
b. Prepare the journal entries Winterton would make when the lease agreement is signed if it leased the locomotives and the lease was considered a capital (finance) lease.
c. Prepare the journal entries Winterton would make when the lease agreement is signed if it leased the locomotives and the lease was considered an operating lease.
d. Compare the three alternatives in (a), (b), and (c). Explain the similarities and dif ferences among them. Under what circumstances might one of the alternatives be preferred over the others? Explain.



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  • CreatedFebruary 26, 2015
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