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Case Summary:
LS Inc wants to acquire new market data and quotation system for its new home office. The system receives the information from online services and display the data onscreen or may save it for later retrieval and system also allow customers to make call and can convey current quotes. Cost of the equipment is $ 1,000,000 and if the company wants to purchase the equipment, they can borrow a loan at an interest rate of 10%.
Useful life of equipment is 6 years and it comes under 3 years MARCS class or it can purchase a contract of 4 years where $20,000 have to be paid at the beginning of each year and it will be sold after 4 years and the residual value is estimated at $200,000. They thought of opting for leasing which will cost $260,000 and includes maintenance cost. Federal plus state tax is 40%.
To identify: The effects of cancellation clause from lessee and lessor point of view and if person X the lessor will insist to change a similar term if cancellation clauses are added and Whether the cancellation clause contain provisions same as the call premium or penalties or any restrictive covenant contained in bond indentures.
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Chapter 19 Solutions
EBK FINANCIAL MANAGEMENT: THEORY & PRAC
- There are two parties in any lease contract—the lessee and the lessor. To a lessor, a lease analysis involves a capital budgeting analysis of the property or equipment to be leased. The lessor’s decision is either to purchase and lease-out the asset, or not make the investment at all. Like any capital budgeting decision, the lessor needs to evaluate the rate of return expected to be earned from making the lease. Further, since the cost and other terms of leases involving high-cost items are negotiated, this rate of return information is also important information for a prospective lessee. From the following statements, identify the steps involved in lease analysis from a lessor’s perspective. Check all that apply. Determine the lease payments minus income taxes and any maintenance expenses that the lessor must incur as per the lease agreement. Determine the invoice price of the leased equipment minus any lease payments made in advance. Determine the periodic…arrow_forwardThe lessor would most likely prefer a ________ or ________ lease to an operating lease. Nonoperating lease treatment would permit a financial service company lessor to remove heavy machinery and equipment, jet airlines, oceangoing vessels, and such from its balance sheet and replace it with the ________, a financial asset compatible with the nature of its business. In addition, the nonoperating lease results in the recognition of ________, rather than ________ revenue. Group of answer choices standalone; operating; fair value of the leased asset; interest income; rent direct financing; operating; net investment in the lease; financing income; unearned standalone price; sales-type; fair value of the leased asset; financing income; unearned direct financing; sales-type; net investment in the lease; interest income; rentarrow_forwardA lease is an agreement in which the lessor conveys the right to use an asset for an agreed period of time to the lessee in return for a payment or series of payments (IAS 17.4). Because of rapid changes in technologies, most of the production companies involve in the lease contracts rather than of purchasing new machineries. Being the accounting specialization student, how will you support this? Explain any three advantages of this contract with suitable examples.arrow_forward
- Able Equipment entered into an arrangement to provide M. T. Bin Wholesale’s data center with Able’s newest server model. Due to security processes in place for its customer data, M. T. Bin requires access to the equipment and the ability to direct its use. Able can replace or reconfigure the equipment if Able finds it’s financially advantageous to do so. Does the contract contain a lease?arrow_forwardThe lessee compares the present value of owning the equipment with the present value of leasing it. Now put yourself in the lessor’s shoes. In a few sentences, how should you analyze the decision to write or not to write the lease?arrow_forwardWhat would be the advantages and disadvantages of leasing assets instead of owning them? How would the financial statements be different in a leasing situation (for both operating leases and finance leases) for the lessee? What about the lessor (including all of the types)? What disclosures should be made by lessees and lessors related to future lease payments?arrow_forward
- A salesperson is selling a leased commercial property. what will happen to the lease after the sale is consummated ? A. the lease is assigned to the new owner ? b. the mease expires and the tenanr must move.? c . the tenant and the new owner must negatiate a new lease ? d. the new owner has the option of canceling the lease or accepting the lease .arrow_forwardWhen preparing the journal entries for an operating lewhich of the following is NOT TRUE? If all of these answers are rue, select "All of the answers above are true". The lessee will reduce the Lease Liability account as lease payments are made. The lessor will recognize depreciation on equipment leased to others. The lessor will reclassify equipment leased to the lessee in an Equipment Leased to others account. The lessee will debit the Right-to-Use Asset account for the present value of the future lease payments. All of the answers above are true.arrow_forwardIn our Anderson Company example, we assumed that the lease could notbe canceled. What effect would a cancellation clause have on the lessee’sanalysis? On the lessor’s analysis?arrow_forward
- In the lease versus buy decision, leasing is often preferable Oa. because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset. Ob. because, generally, no down payment is required, and there are no indirect interest costs. Oc. because it has no effect on the firm's ability to borrow to make other investments. Od. because the lessee owns the property at the end of the least term. Oe. because lease obligations do not affect the firm's risk as seen by investors.arrow_forwardChoose the correct. An acquired entity has a long-term operating lease for an office building used for central management. The terms of the lease are very favorable relative to current market rates. However, the lease prohibits subleasing or any other transfer of rights. In its financial statements, the acquiring firm should report the value assigned to the lease contract as:a. An intangible asset under the contractual-legal criterion.b. A part of goodwill.c. An intangible asset under the separability criterion.d. A building.arrow_forwardlook at the following situation: client D sold a June Oil future contract and plans to deliver. 1- what is the role played by the clearinghouse in the above situation? 2- is the existence of a clearinghouse important?arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningBusiness/Professional Ethics Directors/Executives...AccountingISBN:9781337485913Author:BROOKSPublisher:Cengage
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