Mary Pty. Limited is considering to get an item of machinery in June 2020. Mary, the owner,
Question:
Mary Pty. Limited is considering to get an item of machinery in June 2020. Mary, the owner, could purchase it outright or lease an item of machinery for five (5) years. At the inception of the lease, the market value of $324 432, and it is expected to have a useful life of seven (7) years with an expected of salvage value of $60,000. The implicit interest rate is 12% if she decides to lease it with no bargain purchase option or residual value guaranteed. If Mary decides to purchase it outright she has to spend $650,000, and the machine will be paid in full in two (2) months; but if she decides to lease the machine, it will incur equal lease payments annually. Straight-line method will be used to calculate depreciation expense for the machine.
Required:
Discuss the effects on Statement of Financial Position as at 30 June 2020 and Statement of Profit or Loss for the year ended on the 30 June 2020 FY if the owner decides to lease the machine, compared to purchasing the machine outright.
South western Federal Taxation 2017 Essentials of Taxation Individuals and Business Entities
ISBN: 9780357109144
20th edition
Authors: William A. Raabe, David M. Maloney, James C. Young, Annette Nellen