FINANCIAL ACCOUNTING W/ACCESS >CI<
2nd Edition
ISBN: 9781259999024
Author: SPICELAND
Publisher: MCG CUSTOM
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Textbook Question
Chapter 9, Problem 9.2AP
Explore the impact of leases on the debt to equity ratio (LO9–3, LO9–8)
Thrillville has $41 million in bonds payable. One of the contractual agreements in the bond indenture is that the debt to equity ratio cannot exceed 2.0. Thrillville’s total assets are $81 million, and its liabilities other than the bonds payable are $11 million. The company is considering some additional financing through leasing.
Required:
1. Calculate total stockholders’ equity using the balance sheet equation.
2. Calculate the debt to equity ratio.
3. Explain the difference between an operating lease and a capital lease.
4. The company enters a lease agreement requiring lease payments with a present value of $16 million. Will this lease agreement affect the debt to equity ratio differently if the lease is recorded as an operating lease versus a capital lease?
5. Will entering into the lease cause the debt to equity ratio to be in violation of the contractual agreement in the bond indenture? Show your calculations (a) assuming an operating lease and (b) assuming a capital lease.
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Chunky Cheese Pizza has $61 million in bonds payable. The bond agreement states that the debt to equity ratio cannot exceed 3.25. Chunky’s total assets are $201 million, and its liabilities other than the bonds payable are $91 million. The company is considering some additional financing through leasing. Required: 1. Calculate total stockholders’ equity using the balance sheet equation. 2. Calculate the debt to equity ratio.3. The company enters a lease agreement requiring lease payments with a present value of $26 million. Record the lease. 4. Will entering into the lease cause the debt to equity ratio to be in violation of the bond agreement? Determine your answer by calculating the debt to equity ratio after recording the lease.
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.
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E20-4
Lessee Accounting for Finance Lease
LO 20.4 On January 1, 2019, Concord Corp. signs a contract to lease nonspecialized manufacturing equipment from Stone Inc. Concord agrees to make lease payments of $47,500 per year. Additional information pertaining to the lease is as follows:
The term of the noncancelable lease is 3 years, with a renewal option at the end of the lease term. Payments are due every January 1, beginning January 1, 2019.
The fair value of the manufacturing equipment on January 1, 2019, is $150,000. The equipment has an economic life of 7 years.
Concord guarantees that the equipment will have a residual value of $15,000 at the end of the lease term. Concord considers it probable that it will have to pay $5,000 cash at the end of the lease terms to satisfy this residual value guarantee.
Concord Corp. depreciates similar assets using the…
Chapter 9 Solutions
FINANCIAL ACCOUNTING W/ACCESS >CI<
Ch. 9 - What is capital structure? How do the capital...Ch. 9 - Prob. 2RQCh. 9 - How do interest expense and the carrying value of...Ch. 9 - Prob. 4RQCh. 9 - What are bond issue costs? What is an underwriter?Ch. 9 - Why do some companies issue bonds rather than...Ch. 9 - Prob. 7RQCh. 9 - What are convertible bonds? How do they benefit...Ch. 9 - How do we calculate the issue price of bonds? Is...Ch. 9 - Prob. 10RQ
Ch. 9 - If bonds issue at a discount, is the stated...Ch. 9 - Prob. 12RQCh. 9 - Prob. 13RQCh. 9 - Prob. 14RQCh. 9 - 15.If bonds issue at a discount, what happens to...Ch. 9 - Prob. 16RQCh. 9 - Prob. 17RQCh. 9 - Prob. 18RQCh. 9 - 19.If bonds with a face value of 250,000 and a...Ch. 9 - Prob. 20RQCh. 9 - Prob. 9.1BECh. 9 - Prob. 9.2BECh. 9 - Calculate the issue price of bonds (LO95) Ultimate...Ch. 9 - Calculate the issue price of bonds (LO95) Ultimate...Ch. 9 - Calculate the issue price of bonds (LO95) Ultimate...Ch. 9 - Prob. 9.6BECh. 9 - Prob. 9.7BECh. 9 - Prob. 9.8BECh. 9 - Prob. 9.9BECh. 9 - Record bond issue and related annual interest...Ch. 9 - Record bond issue and related annual interest...Ch. 9 - Prob. 9.12BECh. 9 - Prob. 9.13BECh. 9 - Prob. 9.14BECh. 9 - Prob. 9.15BECh. 9 - Prob. 9.16BECh. 9 - Prob. 9.17BECh. 9 - Calculate ratios (LO98) Surfs Up, a manufacturer...Ch. 9 - Prob. 9.1ECh. 9 - Prob. 9.2ECh. 9 - Compare operating and capital teasel (LO93, LO98)...Ch. 9 - listed below are terms and definitions associated...Ch. 9 - Prob. 9.5ECh. 9 - Prob. 9.6ECh. 9 - Prob. 9.7ECh. 9 - Prob. 9.8ECh. 9 - Prob. 9.9ECh. 9 - Prob. 9.10ECh. 9 - Prob. 9.11ECh. 9 - Prob. 9.12ECh. 9 - Prob. 9.13ECh. 9 - Prob. 9.14ECh. 9 - Prob. 9.15ECh. 9 - Prob. 9.16ECh. 9 - Prob. 9.17ECh. 9 - Prob. 9.18ECh. 9 - (LO92, LO98) On January 1, 2018, the general...Ch. 9 - Record and analyze installment notes (LO92) On...Ch. 9 - Explore the impact of leases on the debt to equity...Ch. 9 - Prob. 9.3APCh. 9 - Prob. 9.4APCh. 9 - Understand a bond amortization schedule (LO96) On...Ch. 9 - Prob. 9.6APCh. 9 - Calculate and analyze ratios (LO98) Selected...Ch. 9 - Prob. 9.1BPCh. 9 - Explore the impact of leases on the debt to equity...Ch. 9 - Prob. 9.3BPCh. 9 - Prob. 9.4BPCh. 9 - Prob. 9.5BPCh. 9 - Prob. 9.6BPCh. 9 - Calculate and analyze ratios (LO98) Selected...Ch. 9 - Prob. 9.1APCPCh. 9 - Prob. 9.2APFACh. 9 - The Buckle, Inc. Financial information for Buckle...Ch. 9 - American Eagle Outfitters, Inc., vs. The Buckle,...Ch. 9 - Ethics The Tony Hawk Skate Park was built in early...Ch. 9 - Prob. 9.7APWCCh. 9 - Prob. 9.8APEM
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