Case2_Solution - Part I Leases To: Conner and Martin...

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Part I Leases To: Conner and Martin Subject: Lease agreement with Tyler Leasing Company Below is the list of advantages of leasing versus owning equipment: 1. 100% financing at fixed rates: Lease are often signed without requiring any money down from the lessee, helping to conserve scarce cash. In addition, lease payments often remain fixed which protects the lessee against inflation and increases in the cost of money. 2. Protection against obsolescence : Leasing equipment reduces the risk of obsolescence to the lessee, and in many cases passes the risk of residual value to the lessor. 3. Flexibility: Lease agreements may contain less restrictive provisions than other debt agreements. 4. Less costly financing for Lessee: Some companies find leasing cheaper than other forms of financing. 5. Off-Balance sheet financing: Certain leases do not add debt on a balance sheet or affect financial ratios, and may add to borrowing capacity. Off- balance sheet financing has been critical to some companies. With regards to the current lease option with Tyler Leasing Company, here is the calculation for classifying the lease agreement as capital or operating lease. Present value of 5 annual rental payments of $145,661 Begin Mode pva$145661, 5n, 10iy, 0fv, compute present value = $607,387 Add: Present value of guaranteed residual value of $125,000 Fv $125000, 5n, 10iy, 0pmt, compute present value = $77,615 Capitalized amount = ($685000 or using PV computations $685002) $685,002 The lease meets the criteria for classification as a capital lease under both IFRS and private enterprise standards for the following reasons: Under PE GAAP: The 75% threshold in the PE standard is met The present value of the minimum lease payments and the present value of the residual value is $685,000 and this is the same as the asset’s fair value. Therefore it exceeds the 90% of fair value threshold set out in the PE standard Only one of the capitalization criteria has to be met to justify classification as a Capital lease. Under IFRS:
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This note was uploaded on 01/01/2012 for the course ACCT 531 taught by Professor Janicecharko during the Winter '11 term at Humber.

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Case2_Solution - Part I Leases To: Conner and Martin...

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