lease_solution

lease_solution - 22,987 138,937 236,393 100,000 3 50,000...

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Solution : True tax lease (“operating” lease) vs. financing lease (“capital lease”) First, you need to compute the amount of the lease obligation. Rents 50,000 # of payments 10 Discount rate 8% PV lease payments $362,344 Part 1 Tax lease Part 2. Financing lease Year Rent expense MACRS Payment Interest expense Principal reduction Installment balance 0 362,344 1 50,000 72,469 50,000 24,988 25,012 337,332 2 50,000 115,950 50,000 22,987 27,013 310,319 3 50,000 69,570 50,000 20,825 29,175 281,144 4 50,000 41,742 50,000 18,492 31,508 249,636 5 50,000 41,742 50,000 15,971 34,029 215,606 6 50,000 20,871 50,000 13,249 36,751 178,855 7 50,000 50,000 10,308 39,692 139,163 8 50,000 50,000 7,133 42,867 96,296 9 50,000 50,000 3,704 46,296 50,000 10 50,000 50,000 0 50,000 0 500,000 362,344 137,656 500,000
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Cumulative total Tax lease Financing lease Financing Tax Year Rent expense MACRS Interest Total lease lease 0 1 50,000 72,469 24,988 97,456 97,456 50,000 2 50,000 115,950
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Unformatted text preview: 22,987 138,937 236,393 100,000 3 50,000 69,570 20,825 90,396 326,789 150,000 4 50,000 41,742 18,492 60,234 387,022 200,000 5 50,000 41,742 15,971 57,713 444,735 250,000 6 50,000 20,871 13,249 34,120 478,855 300,000 7 50,000 10,308 10,308 489,163 350,000 8 50,000 7,133 7,133 496,296 400,000 9 50,000 3,704 3,704 500,000 450,000 10 50,000 500,000 500,000 500,000 362,344 137,656 500,000 Part 1: True tax lease (or operating lease). Judd deduct s rent expense of $50,000 each year over the life of the lease. Part 2: Financing lease (or capital lease). Judd deducts interest expense and depreciation expense over the life of the lease. In addition, the property might be eligible for the Sec. 179 election or bonus depreciation. Part 3: While the total deductions are the same over the life of the lease (and they both tie back to the check booktotal deductions = cash outflows), the financing lease greatly accelerates the timing of the deductions....
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lease_solution - 22,987 138,937 236,393 100,000 3 50,000...

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