FINANCIAL MANAGEMENT: THEORY AND PRACTIC
16th Edition
ISBN: 9780357691977
Author: Brigham
Publisher: CENGAGE L
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Chapter 19, Problem 5P
Reynolds Construction (RC) needs a piece of equipment that costs $100,000. The equipment has an economic life of 2 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 8% with payments due at the end of the year.
Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.)
- a. What is the initial lease liability that must be reported on the balance sheet?
- b. What is the initial right-of-use asset?
- c. What will RC report as an interest expense at Year 1?
- d. What will RC report as an amortization expense at Year 1?
- e. What will RC report as the lease liability at Year 1?
- f. What will RC report as the right-of-use asset at Year 1?
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Reynolds Construction (RC) needs a piece of equipment that costs $100,000. The equipment has an economic life of 2 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 10% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.)
What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value.
What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent.
What will RC report as an interest expense at Year 1? Round your answer to the nearest cent. Enter your…
Reynolds Construction (RC) needs a piece of equipment that costs $150,000. The equipment has an economic life of 3 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 7% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.)
What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value.
$
What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent.
$
What will RC report as an interest expense at Year 1? Round your answer to the nearest cent.…
Your company is currently replacing some of its aging stamping machines. Equipment can be purchased for $300,000; it has a useful life of 10 years and will be depreciated straight-line to zero. After 10 years it can be sold for $25,000. Another option for your company is to lease this Equipment at $36,000 per year. Your company can deduct lease payments as an operating expense when they are paid as this will be an operational lease. Your company borrowing rate is 8% and your tax rate is 25%.
Should you lease or purchase equipment? Why?
Chapter 19 Solutions
FINANCIAL MANAGEMENT: THEORY AND PRACTIC
Ch. 19 - Define each of the following terms: a. Lessee;...Ch. 19 - Distinguish between operating leases and financial...Ch. 19 - Prob. 3QCh. 19 - Prob. 4QCh. 19 -
Ch. 19 -
Ch. 19 -
Ch. 19 - Harmeling Paint Ball (HPB) Corporation needs a new...Ch. 19 - Reynolds Construction (RC) needs a piece of...Ch. 19 - Big Sky Mining Company must install 1.5 million of...
Ch. 19 - Prob. 7PCh. 19 -
Start with the partial model in the file Ch19 P08...Ch. 19 - Prob. 1MCCh. 19 - Prob. 2MCCh. 19 - Prob. 3MCCh. 19 - Lewis Securities Inc. has decided to acquire a new...Ch. 19 - Now assume that the equipments residual value...Ch. 19 - The lessee compares the present value of owning...Ch. 19 - (1) Assume that the lease payments were actually...Ch. 19 - Lewis’s management has been considering moving to...Ch. 19 - Prob. 9MC
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