midsol08f_b

midsol08f_b - ll Sander lieon IJGC Fall 2008\lidterm Exam#2...

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Unformatted text preview: ll. Sander lieon IJGC Fall 2008 .\lidterm Exam #2 Problem I (40 mins) Roxxi lnc. (lessee) enters into a leasing agreement with Haley lnc. Roxxi decides to lease the equipment rather than purchase it outright. because in order to purchase it. Roxxi would haye had to finance the acquisition (resulting in a liability on the balance sheet). .\ssume collectibility of the payments is assured and there are no important uncertainties in the lease. The terms of the lease are as follows: 6 year lease term $22,000 payments. paid at the beginning ofthe year (first payment on 1/1/98) 9".) implicit rate (known to the lessee) Sltllflll of each payment coyers insurance costs paid by Haley (lessor) SIDJJOO guaranteed residual after 6 years FMV of asset at the end off) years is $11,000 Economic/useful life of the asset is 9 years FMV ofthe asset on 1/1/98 is 51 5,000 FMV of the asset after 9 years is $7,000 (‘ost of the asset in Haley's inventory is 895.0th The option to purchase the asset is not considered a bargain Roxxi can currently borrow from the bank at a rate of8% Roxxi pays $500 in property tax each year OOOOOOOOOOOOO 7|{_eqttired 1. Present the necessary journal entries required on the books of both the lessee and the lessor for the first two years of the lease (2/l/98-l2/3l/99). \ 2. Present the balance sheet and income statement for both the lessee and the lessor at the end of 1998 and 1999. 3. Was Roxxi successful in keeping debt off it's balance sheet? If not. how might it have been able to structure the lease to achieve a debt free balance sheet? Would the lessee have preferred this treatment? Why or why not? How about the lessor? 4. Describe in general terms (you need not show numbers) how this problem would be different if Roxxi could borrow at a rate of |(l%. Repeat this for Haley. lndi ~ate how the lessor's accounting would change if the fair value of the asset was 3125.000 on l/l/98 (detailed #s not required). :JI Problem ll (21) tnius) Short .-\nswers I) How are initial direct costs accounted for in lease accounting? Why a re they handled this way '.’ 2) Explain how sale leasebacks can be used as a tool by a company to deal with expansion problems and w hat conditions make it most useful? .-\re there any special accounting rttles that apply to this situation? .3) Indicate how sales and income taxes affect a decision to lease or to buy an asset and what is the most important factor in the decision to buy or lease. 4) Describe what amount is the maximum that can be capitalized by a lessee and why this is so. How does this rule affect the interest rate used to expense interest? How does this affect the lessor? 1 +1)" W ___——————————__________—__—___—________ This (3131: mews (he przsenl value 0f 5! discounted at various raid: of inrcrcst and For various 11m: periods. [I is used (0 com- pul: (he: prescnt va1uc uf 5mg]: payments. TABLE 6A-Z Present Vaiue 011(PV11: PW = H 3150 cxprcsscd as (PW. 1'. (11 /‘l Period: 3% l'/:"’o 3% 4% 5% 6‘?" 7% 3% 9% 10% 1 . . 913039 9756! 970137 96154 95233 .94340 93453 .9259) .91741 90909 2 . . . . . 96117 9518! 94:60 .92456 90703 39000 37344 .85734 64163 152645 3 . . . . 94232 92860 91514 .33900 .36384 .33962 .31630 .79333 .77218 .7513! 4 . . . 92365 90595 38349 135480 .32270 .79209 .76290 .73503 70343 63301 5 . . . 90573 .38385 .8626! .3219] .73353 ,74726 .71299 63058 64993 61092 6 . 118797 ,36230 .83748 .7903! .7462: .70496 66634 .63017 .59617 56-1-47 7 . .37056 .84127 .31309 .75992 .71068 66506 .62275 .53349 .54703 .51316 3 . 135349 32075 .7894! .73069 67634 .6274! .5820! .54027 .50187 .4665! 9 . . .33676 .3007} .76642 70259 I 64-16! .59190 .5439} .50023 A6043 4:410 10 . . . .82035 .78120 .74—409 ,67556 .6139! .55839 50335 .46319 .4224! 38554 1! . . . .30425 .76214 .72242 64958 511463 .52679 47509 .42388 .38753 35049 12 . . . 78849 .74356 .70138 62460 5.5634 .49697 .4440! .3971! .35553 .31863 13 . . . . .7730] .72542 .63095 60057 .53032 46384 .41496 .36770 31613 215966 14 . . . .75783 .70773 .66112 .57748 .50507 447.30 .33782 .34046 29925 26333 15 . . . .7430! .69047 6-1136 .55526 .43102 .41727 .36245 31524 .27454 23939 16 . . . . .72345 .67362 . 2317 .5339! .4531! .39365 .33373 29189 2.5137 21763 17 . . . . .71416 .65720 .60502 .51337 ,43630 .37136 .31657 .27027 23107 .19734 18 . . . . . .70016 .64117 .58739 ,49363 .41552 .35034 .29586 25025 .11 199 .17986 19 . . , . .6864) .6235) ,57029 .47464 .39573 .3305! .2765! .2317! .194-49 .1635! 20 . . . . . .67297 .61027 .55368 ,45639 .37689 .31130 25342 21455 _ .1784} .1436—8 2! . . . . 6.5978 .59539 .5375; ,43883 .35394 .29416 .2415! .19866 .16370 .13513 22 . . , . . 64634 .58036 .52189 42196 .34185 27751 .2257! .13394 .15018 .12235 1'3 . . . . .63416 .56670 .30669 .40573 .32557 26130 .21095 .17032 .13778 .11168 24 . . , . .62172 .55283 .49193 .39012 .31007 24698 .19715 .15770 .11640 .10153 25 . . . , 60953 .53939 .4776! .37512 29530 .23300 .13425 .14602 .11597 09230 11% 12‘?" 14% 15% 16% 13% 20% 12% 14% 15% ! . . . , , 90090 .39236 .87719 .36957 .36207 .34746 .83333 .31967 ,30645 .300“) Z . , . . .31162 .79719 ,76947 .75614 .74316 .71318 .69444 ,67136 65036 64000 3 . . . . . .73119 .71173 .67497 .65752 64066 .60363 .37870 .5507! .52449 .51200 4 , . . . . .6587) .63552 .59208 .57175 .55229 .51579 .48225 .45140 47.297 40960 5 , . . . . .59345 .5674] .51937 .49718' .4761! .4371! .40183 .37000 .3411! .32763 6 . . . . . 5346-4 .50663 .45559 ,43233 .41044 .37043 .33490 .30328 .27509 .26214 7 . . . 48166 .45235 .39964 .37594 .3538} .31393 .27908 24859 22184 .20972 3 . . . . . .43393 .40388 .35056 .32690 .3050} 26604 .23257 20376 .1739! .16777 9 . . . . .3909? .3606! .3075! .23426 26.295 27.546 .1933! .16702 .14423 .13422 10 . . . .35218 .32197 .26974 .24718 22668 .19106 .16151' .13690 .11635 .10737 1! . . . .31723 23743 23662 .214-94 .19542 .16192 .13459 .1122! 09383 03590 12 . . . . 23584 25668 20756 .1369! .16846 .13722 .11216 .09198 .07567 06872 [3 . 2.575! .22917 .18207 .16253 .14523 .11629 09346 07539 .0610] .05498 '.4 . . . 23199 20462 .1597! .14133 .12520 09855 07739 06130 .0492! 0-4398 15 . . . . 10900 .13270 .14010 .12239 .10793 03352 .0649! 05065 03969 03513 16 . . . 13829 .1631: .12239 .10636 09304 07078 05409 04152 .0320! 02315 17 . . . .16963 .14564 .10730 09293 .0302! 0.1993 0-1507 .0340} 0253! .0252 13 . . . , .15232 .13004 09456 .0808! 06914 03983 03756 02739 02082 .0180! 19 . . . . .13763 .1161! 08295 07027 .05961 0-1308 .03130 02236 .01679 .0144! 20 . . , , .12403 .10367 .07276 06110 .05139 .0365! 026013 01874 .01354 .01153 3! . . .11174 09256 .06333 .0531] 04430 03094 02174 .01536 01092 00922 12 . , . . 10067 03264 05599 04620 .03819 02622 .0131! 017.59 00330 00733 33 . . . . 09069 .07379 .0491! 04017 03292 02222 01509 01032 00710 00590 "i . . . . 08170 06588 04308 .03493 02333 01383 012513 00846 .00573 00472 15 . . . . , .0736! 0588?. .03779 .03038 .02447 01596 01048 .0069] .00462 00373 1 1 — .fl TABLE 6.4-4 Fraseni Va1ue ofan Ordinary Annuity ofn Paymmzs of 1 E3ch1PVA1:P1/.4 = —111 1130 :xpresscd 351F101. i. n) 1 W This 1361:: shows (he prescnr vnluc or" an ordinary annuuy of 51 at various intercsr rules and for various time pcriods. 11 IS uscu‘ (0 compulc (he prucm valu: 01' a series of paymcms mad: at rhc end of cnch iniercsl compounding pcriod. l‘l Periods 2% 216% 3% 4% 5% 6% 7% 3% 9% 10% 1 98039 .97561 .97087 96154 .95238 .94340 .93458 93593 91743 90909 3 1.94156 1.92742 1.91347 1.88609 1.85941 1.83339 1 80802 1.78326 1 75911 1.73554 3 3.88388 2.85602 3.82861 2.77509 2.73325 3.67301 2.62432 2.57710 2.53139 3.48685 4 3.80773 3.76197 3.71710 3.62990 3.54595 3.46511 3.38731 331313 3.33972 3.16987 5 4.71346 4.64583 4.57971 4.45182 4.32948 4.21236 4.10020 3.99271 3.88965 3.79079 6 5.60143 5.50813 5.41719 5.24214 5.07569 4.91732 4.76654 4 63338 4.48592 4.35536 7 6.47199 6.34939 6.23023 6.00205 5.78637 5.58238 5.38929 5.20637' 5.03295 4 86842 8 7.32548 7.17014 7.01969 6.73274 6.46321 6.20979 5.97130 5.74664 5.53482 5.33493 9 8.16324 7 97087 7.78611 7.43533 7.10782 6.80169 6.51523 6.24689 5.99525 5.75902 10 8.98259 8.75206 8.53020 8.11090 7.73173 7.36009 7.02358 6.71008 6.41766 6.14457 11 . . 9.78685 9.51421 9.25262 8.76048 8.30641 7.88687 7.49867 7.13896 6.80519 5 49506 13 . 10.57534 10.35776 9.95400 9.38507 8.86325 8.38384 7.94269 7.53608 7.16073 6 81369 13 . . . . . 11.34837 10.98318 10.63496 9.98565 9.39357 8.85268 8.35765 7.90378 7.48690 7.10336 14 . . 12.10625 11.69091 11.29607 10.56312 9.89864 9.39498 8.74547 8.24424 7.78615 7.36669 15 . 12.84926 12.38138 11.93794 11.11839 10.37966 9.71225 9.10791 8.55948 8.06069 7.60608 16 . . . . 13.57771 13.05500 12.56110 11.65230 10.83777 10.10590 9.44665 8.35137 3.31256 7.82371 17 . . . . . 14.29187 13.71220 13.16612 12.16567 11.27407 10.47726 9.76323 9.12164 8.54363 3.03155 18 . . . . . 14.99203 14.35336 13.75351 12.65930 11.68959 10.82760 10.05909 9.37189 8.75563 8.20141 19 . . . . . 15.67846 14.97889 14.32380 13.13394 12.08532 11.15812 10.33560 9.60360 8.95011 8.36492 30 . . . . , 16.35143 15.58916 14.87747 13.59033 12.46221 11.46992 10.59401 9.81815 9.12855 8.51356 21 . . . . 17.01121 16.18455 15.41502 14.02916 12.82115 11.76408 10.83553 10.01680 9.29224 8.64869 32 . . . . . 17.65805 16.76541 15.93692 14.45112 13.16300 12.04158 11.06124 10.20074 9.44243 8.77154 23 . . . 18.29220 17.33211 16.44361 14.85684 13.48857 12.30338 11.27219 10.37106 9.58021 8.88322 24 . . . 18.91393 17.88499 16.93554 15.24696 13.79864 12.55036 11.46933 10.52876 9.70661 8.98474 25 . . . . 19.52346 18.42438 17.41315 15.623083 14.09394 12.78336 11.65358 10.67478 9.82258 9.07704 11% 12% 14% 15% 16% 18% 20% 22% 24% 25% 1 . . . . 90090 89286 .87719 .86957 86207 84746 .83333 .81967 30645 80000 2 . . . . 1.71252 1.69005 1.64666 1.62571 1.60523 1.56564 1.52778 1.49153 1.45682 1.44000 3 . . . . . 2.44371 2.40183 2.32163 2.28323 3.24589 2.17427 2.10648 2.04224 1.98130 1.95200 4 , . . . . 3.10245 3.03735 2.91371 2.85498 2.79818 2.69006 3.58873 2.49364 2.40428 2.36160 5 . . , . . 3.69590 3 60478 3.43308 3.35216 3.27429 3.12717 2.99061 2.86364 2.74538 2.68928 6 . . . . 4.23054 4.11141 3.88867 3.78448 3.68474 3.49760 3.32551 3.16692 3.02047 2.95142 7 . . , 4.71220 4.56376 428830 4.16042 4.03857 3.81153 3.60459 3.41551 3.24232 3.16114 8 . . . . . 5.14612 4.96764 4.63886 4.48732 4.34359 4.07757 3.83716 3.61927 3.42122 3.32891 9 . . . . . 5.53705 5.32825 4.94637 4.77158 4.60654 4.30302 4.03097 3.78628 3.56550 3.46313 10 . 5.88923 5.65022 5.21612 5.01877 4.83323 4.49409 4.19247 3.92318 3.66186 3.57050 11 , . , 6.20652 5.93770 5.45273 5.23371 5.02864 4.65601 4.327 4.03540 3.77569 3.65640 12 . . . . 6.49236 6.19437 5.66029 5.42062 5.19711 4.79322 4.43922 4.12737 3.85136 3.72512 13 . . . . . 6.74987 6.42355 5.84236 5.58315 5.34233 4.90951 4.53268 420277 3.91239 3.78010 14 . . . . 6.98187 6.62817 6.00207 5.72448 5.46753 5.00806 4.61057 4.26456 3.96160 3.82408 15 . . . . . 7.19087 6.81086 6.14217 5.84737 5.57546 5.09158 4.67547 4.31523 4.00129 3.85926 16 . . . . . 737916 6.97399 6.26506 5.95423 5.66850 5.16235 4.72956 4.35673 4.03330 3.88741 17 , . . . . 754879 7.11963 6.37286 6.04716 5.74870 5.22233 4.77463 439077 4.05911 3.90993 18 . . . . 7.70162 7.34967 6.46742 6.12797 5.81785 5.37316 4.81219 4.41866 4.07993 3.92794 19 . . . . 733929 7.36578 6.55037 6.19823 5.87746 5.31624 4.84350 44-4153 4.09672 3.94235 30 , . . . . 7.96333 7.46944 6.62313 6.25933 5.92884 5.35275 4.86958 4.46027 4.11026 3.95388 31 . . . . . 8.07507 7.56200 6.68696 6.31346 597314 538368 4.89132 4.47563 4.13117 396311 33 . . . , 8.17574 764-465 6.74295 6.35866 6.01133 5.40990 4.90943 4.48822 _ 4.12998 3.97049 33 . . 8.26643 7.71843 6.79206 6.39884 6.04425 543312 4.92453 4.49854 4.13708 3.97639 24 , . . 8.34814 7.78432 6.83514 6.43377 6.07263 5.45095 4.93710 4.50700 4.14281 3.98111 25 . . . . . 8.42174 7 84314 6.87293 6.46415 6.09709 5.46691 4.94759 4.51393 4.14742 3.98489 TABLE 6A-6 Pment Value of an Annuity Due 0171 Payment: of 1 Each (PVAD): PVAD = also :xgressed 151F741), 1.711 = (,1 +111PVA. 1, n1 This table shew: (ht: prcscnt value ot'an annuity duc 0(51 at various raid: of Interns: and for various time periods. 1113 used to compute (h: present value of a sane: of payment: mad: at the begmnmg ot'cach 1n1crcu compounding pcnod. Perlods 2% 21/19: 3% 4% 5% 6% 7% 8% 9% 10% 1 ..... 100000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 2 1.98039 1.97561 1.97087 1.96154 1.95238 1.94340 1.93458 1.92593 1.91743 1.90909 3 2.94156 2.92742 2.91347 2.88609 2.85941 2.33339 2.30802 2.78326 2.75911 2.73554 4 . . . . . 3.88388 3.85602 3.82861 3.77509 3.72325 3.67301 3.62432 3.57710 3.53130 3.48685 5 4.80773 4.76197 4.71710 4.62990 4.54595 ' 4.46511 4.38721 4.31213 4.23972 4.16987 6 5.71346 5.64583 5.57971 5.45132 5.32948 5.21236 5.10020 4.99271 4.88965 4.79079 7 . . . . . 6.60143 6.50813 6.41719- 6.24214 6.07569 5.91732 5.76654 5.62788 5.48592 5.35526 8 7.47199 7.34939 7.23028 7.00205 6.78637 6.58238 6.38929 6.20637 6.03295 5.86842 9 8.32548 8.17014 8.01969 7.73274 7.46321 7.20979 6.97130 6.74664 6.53482 6.33493 10 9.16224 8.97087 8.78611 8.43533 8.10782 7.80169 7.51523 7.24689 6.99525 6.75902 11 . 9.98259 9.75206 9.53020 9.11090 8.72173 8.36009 8.02358 7.71008 7.41766 714457 12 . . . . . 10.78685 10.51421 10.25262 9.76048 9.30641 888687 8.49867 8.13896 7.80519 7.49506 13 . 11.57534 11.25776 10.95400 10.38507 9.86325 9.38384 8.94269 8.53608 8.16073 7.81369 14 . . . . . 12.34837 11.98319 11.63496 10.98565 10.39357 9.85268 9.35765 8.90378 8.48690 8.10336 15 . 13.10625 12.69091 12.29607 11.56312 10.89864 10.29498 9.74547 9.24424 8.78615 8.36669 16 . . 13.84926 13.38139 12.93794 12.11839 11.37966 10.71225 10.10791 9.55948 9.06069 8.60608 17 , 14.57771 14.05500 13.56110 12.65230 11.83777 11.10590 10.44665 9.85137 9.31256 8.82371 18 , . . . . 15.29187 14.71220 14.16612 13.16567 12.27407 11.47726 10.76322 10.12164 9.54363 902155 19 . . . . . 15.99203 15.35336 14.75351 13.65930 12.68959 11.82760 11.05909 10.37189 9.75563 9.20141 " 20 . . . . . 16.67846 15.97889 15.32380 14.13394 13.08532 12.15812 11.33560 10.60360 9.95012 9.36492 21 , . 17.35143 16.58916 15.87747 14.59033 13.46221 12.46992 11.59401 10.81815 10.12855 9.51356 22 . 18.01121 17.18455 16.41502 15.02916 13.82115 12.76408 11.83553 11.01680 10.29224 9.64869 23 . . . . . 18.65805 17.76541 16.93692 15.45112 14.16300 13.04158 12.06124 11.20074 10.44243 9.77154 24 19.29220 18.33211 17.44361 15.85684 14.48857 13.30338 12.27219 11.37106 10.58021 9.88322 25 . . . . . 19.91393 18.88499 17.93554 16.24696 14.79864 13.55036 12.46933 11.52876 10.70661 9.98474 11% 12% 14% 15% 16% 18% 20% 22% 24% 15% 1 ..... 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 2 . . . . . 1.90090 1.89286 1.87719 1.86957 1.86207 1.84746 1.83333 1.81967 1.80645 1.80000 3 2.71252 2.69005 2.64666 2.62571 2.60523 2.56564 2.52778 2.49153 2.45682 2.44000 4 3.44371 3.40183 3.32163 3.28323 3.24589 3.17427 3.10648 3.04224 2.98130 2.95200 5 4.10245 4.03735 3.91371 3.85498 3.79818 3.69006 3.58873 3.49364 3.40428 3.36160 6 4.69590 4.60478 4.43308 4.35216 4.27429 4.12717 3.99061 3.86364 3.74538 3.68928 7 . . . . . 5.23054 5.11141 4.88867 4.78448 4.68474 4.49760 4.32551 4.16692 4.02047 3.95142 8 . . . , . 5.71220 5.56376 5.28830 5.16042 5.03857 4.81153 4.60459 4.41551 4.24232 4.16114 9 6.14612 5.96764 5.63886 5.48732 5.34359 5.07757 4.83716 4.61927 4.42122 4.32891 10 . . . . . 6.53705 6.32825 5.94637 5.77158 5.60654 5.30302 5.03097 4.78628 4.56550 4.46313 11 6.88923 6.65022 6.21612 6.01877 5.83323 5.49409 5.19247 4.92318 4.68186 4.57050 12 7 20652 6.93770 6.45273 6.23371 6.02864 5.65601 5.32706 5.03540 4.77569 4.65640 13 7.49236 7.19437 6.66029 6.42062 6.19711 5.79322 5.43922 5.12737 4.85136 4.72512 14 7 74987 7.42355 6.84236 6.58315 6.34322 5.90951 5.53268 5.20277 4.91239 4.78010 15 7.98187 7.62817 7.00207 6.72448 6.46753 6.00806 5.61057 5.26456 4.96160 4.82408 16 8.19087 7.81086 7.14217 6.84737 6.57546 6.09158 5.67547 5.31522 5.00129 4.85926 17 8.37916 7.97399 7.26506 6.95424 6.66850 6.16235 5.72956 5.35673 5.03330 4.88741 18 8.54879 8.11963 7.37286 7.04716 6.74870 6.22233 5.77463 5.59077 5.05911 4.90993 19 8.70162 8.24967 7.46742 7.12797 6.31785 6.27316 5.81219 5.41866 5.07993 4.92794 10 . . . . . 8.83929 8.36578 7.55037 7.19823 6.377 6.31624 5.84350 5.44152 5.09672 4.94235 21 3.96333 8.46944 7.62313 7.25933 6.92384 6.35275 5.86958 5.46027 5.11026 4.95388 22 9.07507 8.56200 7.68696 7.31246 6.97314 6.38368 5.89132 5.47563 5.12117 4.96311 23 9.17574 8.64465 7.74294 7.35866 7.01133 6.40990 5.90943 5.48822 5.12998 4.97049 24 . . . . . 9 26643 8.71843 7.79206 7.39884 704—425 6.43212 5.92453 5.49854 5.13708 4.97639 75 9.34814 8.78432 7.83514 7.43377 7.07263 6.45095 5.93710 5.50700 5.14281 4.98111 “w L Nd; Hm 210W -Exo.e.cb)r 1060,. .1” ‘A‘D’SZM": Mu) Man/M— 97.1w; 1,1901% X my“, Y, [01‘ 1‘7 2 (WM fifis‘m‘“ ‘CGW"( _ 9,3017 “1 630’), - a 9 Mi, . 1115s Lessee l e i w 11/1/98 1 f Leased Asset 111,149 Lease Obligation _ Lease Obligation 111,149 111,149 _.71_ 21,000 \blfih'lb Lease Obligation 21,000 90,149 “,8 Insurance Expense 1,000 7,212 “' Cash 22,000 97,361 91815219069114» 1'19? > , 5?» W210“) M 1131' CAMK ’ ’ Soc. 76,361 112/31/98 6,109 Interest Expense 7,212 ' 82,470 gs, I Lease Obligation 7,212 ,f‘ j " *1 90,149 x 8% 1% D . . E, . (L853 7 . ,1 0131601311011 xpense «LG-#1- {053—3 A , 1 _ 3 Accumulated Dep. 167691 1: * (111,149—10,000)/6 $930 - 1W” 1 12/31/99 1 I I Interest Expense 6.109 '-' .1 Lease Obligation 6,109 * 76,361 x 8% -~-‘;i Depreciation Expense 16,691 ' )1 Accumulated Dep. 16,691 Lessor PVMLP: Pv Rental Payments (22000-1000) x 4.88965* = 102,683 ' .33. PV Guar. Res. Value 10,000 x 0.59627” = 5963 * PVAD:i=9°/o,n=6 . 108,646 i"II’VSS: i = 9%, n = 6 106 1E5 - Lessor 1/1/98 Lease Payment Receivable 108,646 . Lease Pavment Rec. COGS 95,000 "'7 r 108,646 Inventory 95,000 a w; 21,000 Sales 108,646 » ‘ 87,646 7,888 Cash 22,000 95,53 Lease Payment Rec. 21,000 21,000 ' Executor}! Costs 1000 74,534 ' 6,708 81,242, 12/31/98 Lease Payment Receivable ’ 7,888 1/ 9 Interest Income 7,888 * 87,646x 9% 22% 2 OO 1 0 12/31/99 ‘ Lease Payment ReeeivabIe 6,708 Interest Income 6,708 * 74,564 x 9% B. Ba1ance S11eet/1ncome Statement Affect: Lessee: ( 1,; if . \Qa“ ' -' «'1 , L, . NA“ 1 J Balance Sheet: 1" Income Statement: . 1998 _ 1999 w l 1998 1999 I Leased Asset \ 111,149.] 111,149.31:- 1nterest Expense 7,2119; 6, O9 '3 Accumulated Dep. \ (16, b" (33, :1} Depreciation Expense - , [I by i CV 94,1fl3 77 Z Insurance Expense 1,0003 1,000 i _, ,. 0w- fix 64? ‘ 5'26 -- SFPLease Obligation - 21,000" " 21,00 ’ , L/T Lease Obligation ‘17)“ < 76,361 61,47b81v2? Ba1ance Sheet: Income Statement: ., 1998 1999‘ r I “a, 1998 1999 SN Lease Payment Rec. IKEWKV 21,0003 21,000;§:5,‘, Sa1es 1086460 L/T Lease Payment Rec. \ / 74,534 60,242 COGS — 95,00g i Gross Profit ' 13,646 Interest 1ncome 7,8885: 6,708": X) W 16 99116.- Mm 6x19 107 § 08 l‘MDW ‘ , 3 Qth/(Lm {arva flIfl/r‘s— ‘5) 93. The ssee is unsuccessful agkfeping debt of its’ balance sheet (lease obligation). In order to the debt ” N 03‘ the balanc sheet, contingent rental amounts could be used or thesJesidual could be made unguar‘anteed (or z i guaranteed by third parqr), Basicain P\7 'M'LP needs to fall below 90%;}: in order for the lease to'be'Eiassirreg ‘5 I i as an operating lease. The lessee ptefers operating leases because-no liabilig is recorded. The lessor prefers a capital least: because it recognizes , i l. ,u s‘-_\_Q__l‘_u? tn rifle ft $519: o f (a/LollTr/d. Anon/fr < {segue/145%: 5.4-, ... _..‘__ w- 7 ‘0 D. If the incremental burrowing rate was 10%E then 9%_wou_l_d_be used and w0uld result in the l '. lessee capitalizing the samgngmbers a‘s‘thelesgyrfThi—s would change the depreciationand interest gpensinumbers 11 for the lessee as well. The lessor’s numbers would not at all. C PVMLD W7L9 7 h i: f‘“ “’7 - r. w ._..., ll ‘ i not capitaliz 11,. whic would ch ‘ ' M1413 ' nses would go as wel . 0 change would . (JR, _’ iii—q"? flame wa ch qflr rd tori \03 we is<7o7°flmJ M Quad) mug: AN amt/1L . . TH.) mum SH-w‘ Ram’- NC 4 Wow ~95" V‘AvéiliélQSMf" I x .. . _ .. _ 1 WWW - i l? . - - : ’quoo ’ Wham on 5/, 0m. [r J. 1-; PIC q . ( _ M r ‘ y . nitial direct costs are expensedhy the lessor-when profits are recognized to reflect the matchingdprinciple. ‘5 For an operating lease, lDCs are expensed over the‘termfito account for the fact that profits are spread over the 7- lease term. Similarly, for a direct financing capital lease, lDCs are expensed over thedease term to accoungfor the faci ' that profits are spread over the lease term. For a sales-type capital lease, however, the lDCs are expensedjinimediately to account for the fact that most ofthe profit from the lease is recognized immediately. " u effective tax rate. rtax exemp ons, any changes to a compan state tax alternative mini um capital gains tax, '1] change the effectiv 'pense \ ere wrong in the expense adj tment m the iise is also char ed to ately used. 8' cc an inc 'od as well set. The income tax e sset or deduction is results in the fut re p well as the uncertainty balance sheet adjustme, . adjustment occurs asfl'ell w ounding the future use of us creating poor matchii n the asset is used, or matchi etax r if / _ 4, No change is needed if the land rental value doesn’t ex eed 25%?4 the total tal value. If it does exceec 25%, the agre rent must be split up into leases (one for the la and one for the building)/One may lease land tc obtain a tax rite—ofi‘ for it but usually winds up foregoing the appreciatiof’of the land. / 108 Econ 136C Midterm #2 Answer Key 1. 17 Points Total Initial direct costs are expensed by the lessor when profits are recggpized (3) from a lease to reflect the matching principle (2). Thus in a: Profits are: Initial Direct Costs are: Operating Lease (2) Spread over the lease term (2) Expensed over lease term Direct Financing Spread over the lease term (2) Expensed over lease term Capital Lease (2) Sales Type (2) Recognized Immediately (2) Expensed immediately 2. 17 Points Total Sale/lease backs are a financing tool/raise capital/raise money (5) used by Co.’s with appreciated assets (3). They want to use someone else’s financing power/borrowing power (3) to expand their operations. There is a figurehead who technically owns asset & arranges financing on it and has their mortgage payments be paid by lease payments. The use of the asset during the lease term stays with the original owner (3). Gain on these sale leasebacks must be deferred & amortized (3) over lease term. **If say no tax 1031 gain or no liability if operating lease, (3) if missed one above. 3. 28 Points Total Income taxes do not have major consequences (5) b/c the total 15 paid to acquire the asset will be deducted on the tax return whether you but or lease the asset. However, if you b_uy an asset, there are tax provisions that will allow you to expense depreciation and interest in ggater amounts in earlier periods (3) leaving a time value of money advantage (3) to a buy. Sales taxes are usually paid on leases over the lease term (3), giving leasing an advantage of time value of money (3) and if the lease is short term the advantage of not paying sales tax on the portion of the assets life not used (3). However you do pay sales tax on the interest (3) incurred in a lease leaving a disadvantage to leasing. The most important factor is which costs less (3) in present value (2) at fair rate. 4. 16 Points Total The maximum capitalized for lessees is fair market value (5) of the asset so as to not violate the conservatism (3) principle of not showing asset greater than their fair market value. If we must use this maximum, the interest rate used to assign interest must be increased (5) to the rate that properly amortized the amount capitalized. This rate m not affect the lessor (3) in any way. They can capitalize what they got in present value. ...
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This note was uploaded on 01/31/2010 for the course ECON 136C taught by Professor Anderson during the Fall '08 term at UCSB.

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midsol08f_b - ll Sander lieon IJGC Fall 2008\lidterm Exam#2...

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