A531-13UFS

A531-13UFS - Name: Umme Fatema Siddique Student Number: 805...

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Name: Umme Fatema Siddique Student Number: 805 936 291 Course Code/Number: ACCT 531 Assignment Number: 13 Accounting in Action: CM2 > Part I: Leases Requirement: Analyze the Tyler Leasing Company proposal Memorandum DATE: 6 th August, 2011 TO: Conner and Martin, Management Team, CM2 Corporation FROM: Umme Fatema Siddique RE: Analysis of Lease agreement with Tyler Leasing Company Advantage of Lease over Purchase: There are several advantages of leasing versus owing equipment. First of all, leases are often signed without necessitating any down payment from the lessee. It helps to preserve company’s limited cash balance. Furthermore, Lease financing is not affected by inflation. Even if the costs go up over some years, CM2 will still pay the same lease rent as agreement. Secondly, Lease agreements may comprise less obstructive provisions than other debt agreements. Even some companies find leasing agreement cheaper than other forms of financing. Moreover, leasing increase the borrowing power of the company as its debt equity ratio will be unaffected by lease purchase. Finally, the periodic lease rents paid by the lessee are tax deductible expenditure, and Bad investments can be avoided by lease purchasing. Whether be Classified as an Operating or Capital (Finance) Lease: According to IFRS and PE GAAP, the lease meets the criteria for capital lease. Because as stated by the following calculation below with the IFRS and GAAP requirement, we can conclude that: The PV of the minimum lease payments and the PV of the residual value of total $685,002 is almost the same as the asset’s fair market value. Thus, it exceeds the 90% of fair value within the PE GAAP.
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The 75% amount in the PE GAAP is also met According to IFRS, the lease allows the lessor to recover considerably all of its investments in the leased asset and earn a return on the investment. This is provided if the minimum value of the lease payments is close to the fair value of the asset. As the PV of the minimum lease payments and the PV of the residual value is $685,002 and this is the same as the asset’s fair value, the requirement is met. (same as PE GAAP standard) Supporting Calculations: The necessary calculations regarding the classification of lease agreement: Using financial calculator with BGN Mode, calculate PV of lease: PMT = ($145,661) FV = $0 N = 5years I = 10% CPT PV = $607,387 Using financial calculator, calculate PV of Residual Value: PMT = $0 FV = $125,000 N = 5 I = 10% CPT PV = $77,615 PV of Lease $607,387 Add: PV of residual value 77,615 Capitalized Amount $685,002 Effect of the Proposal on CM2’s Balance Sheet: CM2
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A531-13UFS - Name: Umme Fatema Siddique Student Number: 805...

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