Premium Blinds Ltd. specializes in the manufacture of custom and pre-finished blinds and drapes for windows and doors. The firm was founded by Bill Khadim, who retired 10 years ago and now lives in Orlando, Florida. When he retired, Bill assigned 60% of the shares of the corporation to Sara Khadim, his daughter. Much of Bill’s retirement income comes from the dividends he receives on his remaining Premium Blinds shares. Premium Blinds is now run by Sara. There are no other shareholders. The custom window covering industry has been a highly competitive industry for many years, challenged by overcapacity and by less expensive on-line options. Premium Blinds has generally been able to attain reasonable profit levels in most years by specializing in higher quality installations with select builders and window manufacturers across Canada. During lean years, Premium Blinds has been able to rely on its credit union, the Town Credit Union (TCU), for loan support. As a result, a close working relationship has developed between TCU and Premium Blinds. In the spring of 20X2, Sara decided that the firm needed to acquire some new, technologically improved production equipment in order to stay up-to-date and to protect the company’s already-thin profit margins. The equipment has a list price of $350,000, although Sara thought that it would be possible to bargain the price down to about $330,000. After discussing the purchase with the credit union, Sara realized that the company had two options for acquiring the equipment. One option was to buy the equipment directly, with financing for 100% of the purchase price provided by means of a ten-year term loan from the credit union, to be repaid at $33,000 per year for ten years, with interest at 6% per annum due each year-end. The second option was to lease the equipment from LeaseCorp, the leasing subsidiary of a major Canadian bank. LeaseCorp would buy the equipment on behalf of Premium Blinds and would then lease it to Premium for 10 years, with beginning-of-year lease payment of $36,000 per year. After the expiration of the initial lease term, Premium would have the option of continuing the lease by paying $1,000 per year for as long as Premium wishes to retain the equipment. Such equipment normally has a useful life of 15 to 20 years, although the later years of the useful life are marked by decreasing productivity due to continuing technological improvement in equipment design. Premium’s thin profit margins made it quite possible that the firm would not be able to get the quickest possible tax advantage from CCA on the new equipment if the firm bought the equipment directly. On the other hand, if LeaseCorp held title under a lease the lessor could use the depreciation to reduce its income taxes, and the tax benefits would be passed on to Premium Blinds in the form of an after-tax implicit interest rate of 4%, less than the 6% rate that Premium would have to pay on the term loan from the bank. Before deciding on the financing method, Sara wants a report from her accountant, David Geroux, on the cash flow and financial reporting implications of the alternatives. She also wants David to make a recommendation on the most appropriate accounting policies to adopt should the lease option be chosen. Sara is hoping Premium will be acquired by a public company, as part of industry consolidation in the next year or two, and she does not want to take actions that might prove detrimental to the company’s reported results. Instructions Please prepare case report outlining both accounting/financial reporting issues .

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Accounting and Financial Reporting Issues Premium Blinds Ltd is considering the purchase of new technologically improved production equipment The comp... View the full answer