Comparison between loan/purchase and operational and financial leasing. Carom Sports Collectibles Shop plans to acquire on January
Question:
Comparison between loan/purchase and operational and financial leasing. Carom Sports Collectibles Shop plans to acquire on January 1, 2013 a computerized cash register system that costs $100,000 and has a five-year shelf life and no residual value. The company is considering two plans to acquire the system:
(1) Direct purchase. To finance the purchase, the company will issue a bond with a face value of $100,000 with 10% semiannual coupons on January 1, 2013, at par. The bonds mature in five years.
(2) Lease. The lease requires five annual payments as of December 31, 2013, 2014, 2015, 2016, and 2017. The lease payments are such that they have a present value of $100,000 as of January 1, 2013, when discounted at 10% per annum.
The company uses the straight-line method of depreciation and amortization of assets.
a. The. Applying the old rules, verify that the required lease payment amount is $26,380 by constructing an amortization schedule of the five payments. Note that there will be a rounding error of $2 in the fifth year. However, you can consider the payment to be $26,380 for the remainder of the issue.
b. Which balance sheet accounts are affected if the company selects plan (1)? What if the company chooses plan (2) using the operating lease method? What happens if the company chooses plan (2) using the finance lease method?
c. What is the total of depreciation and interest expense for the five years under plan (1)?
d. What is the total expense of the five years under plan (2) if the company could account for it as an operating lease?
e. How about finance leasing? and. Why are the answers in item d the same? Why are the answers in item e different from those in item d?
f. What is the total expenditure for the first year under plan (1)? And under plan (2) as an operating lease? And under plan (2) as a finance lease?
g. Repeat item f for 2014.
Financial Accounting an introduction to concepts, methods and uses
ISBN: 978-0324789003
13th Edition
Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis