A car manufacturer has a car with a carrying value of €18,000 on their balance sheet. The manufacturer enters into a car lease agreement with a customer over a four year period. The customer will pay €6,000 per year and the least interest rate is 4%. Show how the manufacturer will account for this agreement and the effect on the balance sheet, income statement and cash flow over the lease period. Show how this lease agreement would be accounted for by the manufacturer if significant risks of ownership had not been transferred to lessee. Explain the reasons a company may prefer to lease an asset rather than purchase.
A car manufacturer has a car with a carrying value of €18,000 on their balance sheet. The manufacturer enters into a car lease agreement with a customer over a four year period. The customer will pay €6,000 per year and the least interest rate is 4%. Show how the manufacturer will account for this agreement and the effect on the balance sheet, income statement and cash flow over the lease period. Show how this lease agreement would be accounted for by the manufacturer if significant risks of ownership had not been transferred to lessee. Explain the reasons a company may prefer to lease an asset rather than purchase.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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- A car manufacturer has a car with a carrying value of €18,000 on their
balance sheet . The manufacturer enters into a car lease agreement with a customer over a four year period. The customer will pay €6,000 per year and the least interest rate is 4%.
- Show how the manufacturer will account for this agreement and the effect on the balance sheet, income statement and
cash flow over the lease period.
- Show how this lease agreement would be accounted for by the manufacturer if significant risks of ownership had not been transferred to lessee.
- Explain the reasons a company may prefer to lease an asset rather than purchase.
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