Dunbar Corporation can either purchase an asset for $38,000, which will have no value after 13 years, or lease the same for 13 years with an annual lease payment of $4,458, due at the end of each year. The company's cost of debt is 8%. The IRS classifies the lease as a non-tax- oriented lease. What is the net advantage of leasing? Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest cent.

Dunbar Corporation can either purchase an asset for $38,000, which will have no value after 13 years, or lease the same for 13 years with an annual lease payment of $4,458, due at the end of each year. The company's cost of debt is 8%. The IRS classifies the lease as a non-tax- oriented lease. What is the net advantage of leasing? Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest cent.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter20: Accounting For Leases

Section: Chapter Questions

Problem 10GI: Owens Company leased equipment for 4 years at 50,000 a year with an option to renew the lease for 6...

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Giannis Corporation leases a building to Jabari, Inc. on January 1, 2020. The following facts pertain to the lease agreement. 1. The lease term is 10 years with equal annual rental payments of $3,449 at the end of each year. 2. Ownership does not transfer at the end of the lease term, there is no bargain purchase option, and the asset is not of a specialized nature. 3. The building has a fair value of $34,000, a book value to Giannis of $22,000, and a useful life of 15 years. 4. At the end of the lease term, Giannis and Jabari expect the residual value of the building to be $12,000, and this amount is guaranteed by Money, Inc., a third party. 5. Giannis wants to earn a 5% return on the lease, and collectibility of the payments is probable. Instructions a. Describe the nature of this lease to both Giannis and Jabari. b. Assume the present value of lease payments and third-party guarantee is $34,000 and the rate of return to amortize the net lease receivable to zero is 13.24%.…
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