Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement

Lease versus purchase decision (LO4) Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If the company purchases the asset, the cost will be $10,000. It can borrow funds for four years at 12 percent interest. The firm will use the three-year MACRS depreciation category (with the associated four-year write-off). Assume a tax rate of 35 percent.

The other alternative is to sign two operating leases, one with payments of $2,600 for the first two years, and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar.

a. Compute the aftertax cost of the leases for the four years.
b. Compute the annual payment for the loan (round to the nearest dollar).
c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan due to rounding.)
d. Determine the depreciation schedule (see Table 12–9).
e. Compute the aftertax cost of the borrow–purchase alternative.
f. Compute the present value of the aftertax cost of the two alternatives. Use a discount rate of 8 percent.
g. Which alternative should be selected, based on minimizing the present value of aftertax costs?

Click here for the solution: Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement

(Lessor and Lessee Accounting and Disclosures) Sylvan Inc. entered into a noncancelable lease arrangement with Breton Leasing Corporation for a certain machine

Case 21-2 (CA21-2) (Lessor and Lessee Accounting and Disclosures) Sylvan Inc. entered into a noncancelable lease arrangement with Breton Leasing Corporation for a certain machine. Breton's primary business is leasing; it is not a manufacturer or dealer. Sylvan will lease the machine for a period of 3 years, which is 50% of the machine's economic life. Breton will take possession of the machine at the end of the initial 3-year lease and lease it to another, smaller company that does not need the most current version of the machine. Sylvan does not guarantee any residual value of the machine and will not purchase the machine at the end of the lease term.

Sylvan's incremental borrowing rate is 10%, and the implicit rate in the lease is 9%. Sylvan has no way of knowing the implicit rate used by Brenton. Using either rate in the lease is 9%. Sylvan has no way of knowing the implicit rate used by Brenton. Using either rate, the present value of the minimum lease payments is between 90% and 100% of the fair value of the machine at the date of the lease agreement. Sylvan has agreed to pay all executor costs directly, and no allowance for the costs is included in the lease payments.

Brenton is reasonably certain that Sylvan will pay all lease payments, and because Sylvan has agreed to pay all executor cost, there are no important uncertainties regarding costs to be incurred by Breton. Assume that no indirect cost are involved.

Instructions:
(a) With respect to Sylvan (the lessee), answers the following.
(1) What type of lease has been entered into? Explain the reason for your reason.
(2) How should Sylvan compute the appropriate amount to be recorded for the else or asset acquired?
(3) What accounts will be created or affected by the transaction, and how will the lease or asst and other cost related to the transaction be matched with earnings.
(4) What disclosures must Sylvan make regarding the leased asset?
(b) With respect to Breton (the lessor). Answer the following:
(1) What type of leasing arrangement has been entered into? Explain the reason for your reason.
(2) How should the lease be recorded by Brenton, and how are the appropriate amounts determined?
(3) How should Breton determined the appropriate amount of earning to be recognized from each lease payment?
(4) What disclosures must Breton make regarding the lease?

Click here for the solution: (Lessor and Lessee Accounting and Disclosures) Sylvan Inc. entered into a noncancelable lease arrangement with Breton Leasing Corporation for a certain machine