Mitten Manufacturing Ltd.’s (MML) sole shareholder and owner, Angela Mitten, has made the decision to sell her ownership in the business in order to be able to retire in the near future.
MML produces children’s mittens and scarves.
Prospective buyer, John Kachurowski, feels that this purchase would result in synergies and economies of scale with his current company that manufactures winter jackets. If this acquisition does go through, it is quite likely that the share price would increase due to the synergy of the merger. Generally, mergers occur for the purpose of improving financial performance for shareholders – making the likelihood of this potential merger ideal.
Angela has offered to sell MML to John for the book value of …show more content…
This is due to two of the four Capital Lease classification criteria being met, which do not allow for the company to record it as an Operating Lease. The following journal entries should have been entered throughout 2014:
1) Dr. Lease Equipment 88,000 Cr. Lease Obligation 88,000
2) Dr. Lease Obligation 24,066.26
Cr. Cash 24,066.26
3) Dr. Interest Expense 3,057.02
Cr. Interest Payable 3,057.02
4) Dr. Amortization Expense 4,400
Cr. Accumulated Amortization 4,400
While there are more incentives to classifying a lease as operating such as tax incentives, higher return on asset, and better solvency ratios, the lease must be classified as a Capital Lease so as to stay in accordance with IFRS. However, a Capital Lease does provide a company with a higher operating cash flow, and reduces Net Income,
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The reason we want to capitalise the lease commitments is that reporting under operating assets leads to substantial amounts of off-balance-sheet assets and liabilities. Hence, it is difficult to compare financial statements between two similar companies but use different accounting methods for essentially the same transaction.
C. In a sales-type lease the carrying value of the asset is charged to cost of the asset leased (expense), and the present value of the minimum lease payment as the amount of the sale. For direct financing leases no sales or expense is recognized because the asset is removed from the books. The difference between its carrying value and the undiscounted minimum lease payments is recorded as unearned interest revenue. The net investment in a sales type lease ia accounted for in a similar manner as a direct financing
From the above classification we can see that all the points indicate that the leases undertaken by David Jones Ltd as a Lessee are Operating Leases or Finance leases and can be determined using the steps above. Being such a big company, David Jones Ltd has both Operating and Financial leases and they are taken mainly to run the firm’s stores and warehouses. Under the annual report for the half year ended 2013 it is clearly evident that the cost of leasing activities for David Jones Ltd has increased by 4.17mn. “Payments made under operating leases, where the lease agreement includes predetermined fixed rate increases, are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease. Other operating lease payments are expensed as incurred. Lease incentives received are recognised in the Statement of Comprehensive Income as an integral part of the total lease expense and spread over the lease term.”
Synthetic leases can serve two important purposes: First, for financial accounting purposes, they enable lessees/sponsors to treat leases as operating leases, whereby payments are recorded as rent expense and the underlying assets and the associated liabilities are kept off the lessee’s balance sheet. This treatment of the lease enables the company to show a stronger balance sheet than if the lease was treated as a capital lease (Soroosh and Ciesielski, 2009).
Leases are classified into two main types; finance lease and operating lease. The impact of each type of lease on the company’s annual report is different. When accounting for finance leases, for example, the concerned lessee makes recognition of the asset that has been leased in the statement of financial position or balance sheet and consequently charges all other finance charges including the depreciation charges relating to the leased asset on to the statement of income or profit and loss
There are various issues involved in leases that may affect the interest of the trucking company. The first issue is related to the improvement cost of the leased asset. It is difficult to determine that this cost should be capitalized or should be treated as an expense. The different types of leases can have a significant impact on the financial reporting of the trucking company. “A sales-type lease or direct financing lease is recognized as an asset and liability on the balance sheet, while in an operating lease the rent payment is recognized as an expense”(Lee, 2003). It is also difficult to determine whether a particular arrangement is a lease or a simple business transaction. These issues may affect the profitability of the trucking company.
Notice that a merger analysis consists of two estimating issues which are projected merger cash flows and the appropriate discount rate. Sometimes, estimating cash flows in a merger is a little difficult so that we need to summarize the series of yearly cash flows and inflows. Mr Harry, we need to be aware, although Mr Jack is your friend, he may refuse to provide detailed information about Framingham Flange Factory’s future projections or past history. The second issue is the appropriate discount rate due to an acquisition is an equity transaction; it should be done using a discount rate that reveals the cost of equity
Financial leases are different from operating leases because they do not provide for maintenance. Financial leases are not cancelable. They are only for a period that approximates
One aspect of this can be seen in the simplified break down of the qualifications in determining between an operating lease and a capital lease. This is very important since the determination of a lease agreement will decide on whether an asset and liability are included on the balance sheet or if it should only be footnoted within the financial statements. A current proposal for lessees, would require the recognition of a right-of-use (ROU) asset and a lease liability in the balance sheet, regardless of whether the lease would have been considered a capital or operating lease
This paper will provide an overview of lease accounting. It will present the history, current status, and future implications of the latest proposed standard, as jointly issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Furthermore, the paper will take into account relevant observations made by various proponents who are concerned about the standard, and conclude with a personal opinion on the standard and why it’s better
The marketing manager would like to cut the selling price by $6 and increase the advertising budget by $2,700 per month. The marketing manager predicts that these two changes would increase monthly sales by 100 units. What should be the overall effect on the company 's monthly net operating income of this change? Show your work!
For Metalcrafters Inc., the first thing I would do is to decide whether or not each alternative is mutually exclusive or independent. In this case, the stamping press alternatives are mutually exclusive, the extrusion press alternatives are mutually exclusive, and the new parts orders are mutually exclusive.
Present Value ($000) Operational Lease 1,781 Capital Lease 1,835 Buy 2,224 Samuel Malone the chief executive officer feels that the equipment is crucial to their research and development department and be a good long-term investment. He would prefer a capital lease to an operational lease. Nicholas Tortelli
On the contrary, in operating lease, risk and rewards are not transferred completely to the lessee. The term of lease is very small compared to finance lease. The lessor depends on many different lessees for recovering his cost. Ownership along with its risks and rewards lies with the lessor. Here, the lessor is not only acting as a financer but he also provides additional services required in the course of using the asset or equipment. Example of an operating lease is music system leased on rent with the respective technicians