Lease v s. buy alternatives
• LO6–3, LO6–7, LO6–9
Kiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine needed is manufactured by Lollie Corp. The machine can be used for 10 years and then sold for $10,000 at the end of its useful life. Lollie has presented Kiddy with the following options:
1. Buy machine. The machine could be purchased for $160,000 in cash. All insurance costs, which approximate $5,000 per year, would be paid by Kiddy.
2. Lease machine. The machine could be leased for a 10-year period for an annual lease payment of $25,000 with the first payment due immediately. All insurance costs will be paid for by the Lollie Corp. and the machine will revert back to Lollie at the end of the 10-year period.
Required:
Assuming that a 12% interest rate properly reflects the time value of money in this situation and that all maintenance and insurance costs are paid at the end of each year, determine which option Kiddy should choose. Ignore income tax considerations.
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INT. ACCOUNTING<CUSTOM>W/CONNECT 2-YEA
- E10.21 (LO3) (Government Grants) Rialto Group received a grant from the government of £100,000 to acquire £500,000 of delivery equipment on January 2, 2019. The delivery equipment has a useful life of 5 years. Rialto uses the straight-line method of depreciation. The delivery equipment has a zero residual value. Instructions A. If Rialto Group reports the grant as a reduction of the asset, answer the following questions. 1. What is the carrying amount of the delivery cquipment on the statement of financial position at December 31I, 2019? 2. What is the amount of depreciation expense related to the delivery equipment in 2020? 3. What is the amount of grant revenue reported in 2019 on the income statement? B. If Rialto Group reports the grant as deferred grant revenue, answer the following questions. 1. What is the balance in the deferred grant revenue account at December 31, 2019?…arrow_forwardProblem 13NOREEN INC, a truck dealer, sells a truck on January 1, 2019, to MENDOZA INC for P3,000,000. NOREEN agrees to repurchase the truck on December 31, 2020 for P3,630,000. How much should NOREEN INC record interest and retirement of its liability to MENDOZAINC on December 31, 2020?None C. 330,000; 3,630,000 300,000; 3,600,000 D. 630,000; 3,630,000arrow_forwardP11.11 (LO4) (Mineral Resources) Phelps Oil Wildcatters plc has leased property on whichoil has been discovered. Wells on this property produced 36,000 barrels of oil during thepast year, which sold at an average sales price of £65 per barrel. Total oil resources of thisproperty are estimated to be 500,000 barrels. The lease provided for an outright payment of£1,200,000 to the lessor (owner) before drilling could be commenced and an annual rental of £62,000. A premium of 4% of the sales price of every barrel of oil removed is to be paidannually to the lessor. In addition, Phelps (lessee) is to clean up all the waste and debrisfrom drilling and to bear the costs of reconditioning the land for farming when the wells areabandoned. The estimated fair value, at the time of the lease, of this clean-up andreconditioning is £50,000.Instructionsa. From the provisions of the lease agreement, compute the cost per barrel for the pastyear, exclusive of operating costs, to Phelps.b. Compute the…arrow_forward
- A6 Purchase the software from ABC Corporation. The agreement with ABC will allow XYZ inc to operate and run the software directly onXYZ’s own internal server. In addition to the cost of the software, XYZ inc anticipates it will incur training and implementation costs for its customer service employees. The purchased software is expected to have a useful life of 3 years. Determine 9-digit FASB codification? and give me your insight and evaluate alternative solution?arrow_forwardProblem 13NOREEN INC, a truck dealer, sells a truck on January 1, 2019, to MENDOZA INC for P3,000,000. NOREEN agrees to repurchase the truck on December 31, 2020 for P3,630,000 Using the information above, what is the interest expense for 2019?2.A. None C. 330,000 B. 300,000 D. 630,000arrow_forwardMa3. Question 5 An undertaking (lessor) leases a truck to a customer for 3 years. The value of the truck at the end of the lease is estimated at 40% of its original cost. Market data suggests that the likely range of residual values after 3 years is 40% to 50% of original cost. The lessee will guarantee any fall in the truck's residual value below 40% down to 25% of original cost. The lessor will bear the cost of any fall in residual value below 25% of original cost. A. Based on the above information, indicate whether the lease is an operating or finance lease. Provide appropriate reasons for your choice. B. Explain the treatment for operating lease payments according to IAS 17. C.GLtd a small company, leases a car from for three years at $10, 000 per month. The first four (4) months rental is payable on day one (1) and no rental is paid in months 34-36. i. Show the double entry treatment in the books of the lessee for rental in month 1. ii. Show the double entry…arrow_forward
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- P17–4 LEASE VERSUS PURCHASE JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 21% tax bracket, and its after-tax cost of debt is currently 8%. The terms of the lease and of the purchase are as follows: LEASE Annual end-of-year lease payments of $25,200 are required over the three-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $5,000 at termination of the lease. PURCHASE The equipment costs $60,000 and can be financed with a 14% loan requiring annual end-of-year payments of $25,844 for three years. JLB will depreciate the equipment under MACRS using a three-year recovery period. (See Table 4.2 for the applicable depreciation percentages.) JLB will pay $1,800 per year for a service contract that covers all maintenance costs; insurance and other costs will be borne by the JLB, who plans…arrow_forward31..../// Partially correct answer icon Your answer is partially correct. Marin, Inc. leases a piece of equipment to Bucks Company on January 1, 2020. The contract stipulates a lease term of 5 years, with equal annual rental payments of $7,367 at the end of each year. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. The asset has a fair value of $40,000, a book value of $38,000, and a useful life of 8 years. At the end of the lease term, Marin expects the residual value of the asset to be $12,000, and this amount is guaranteed by a third party. Marin wants to earn a 6% return on the lease and collectibility of the lease payments is probable. Assume that the lease receivable is $40,000, deferred gross profit is $2,000, and the rate of return to amortize the net lease receivable to zero is 7.64%.Prepare Marin’ journal entry at the end of the first year of the lease to record the receipt of…arrow_forwardH5. St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $24,000 to $44,000 per year. The new machine will cost $82,500, and it will have an estimated life of 8 years and no salvage value. The new riveting machine is eligible for 100% bonus depreciation at the time of purchase. The applicable corporate tax rate is 25%, and the firm's WACC is 12%. The old machine has been fully depreciated and has no salvage value. What is the NPV of the project? Negative value, if any, should be indicated by a minus sign. Round your answer to the nearest cent.arrow_forward
- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT