200,000Rs 27,59810 years10%50%maintenance, for payments of Rs 200,000 at the end of each year. Fewa's tax rate is 40Rs 20,000st of debtApplicable tax rateInvestment tax creditBeFewa Securities Inc. has decided to acquire a new market data and quotation system forits Pokhara home office. The system receives current market prices and otherinformation from several on-line data services, then either displays the information ccustomers to call up current quotes on terminals in the lobby. The equipment costs Rsa screen or stores it for later retrieval by the firm's brokers. The system also permits500,000, and, if it were purchased, Fewa could obtain a term loan for the full purchasemethod over 4-year life. Expected salvage value is Rs 50,000. As an alternative to theborrow-and-buy plan, the equipment manufacturer informed Fewa that consolidatedleasing would be willing to write a 4-year lease on the equipment, includingMethod of depreciation followed is straight-line depreciation.How do you analyze lease versus purchase decision using internal rate ofanalysis?returnMini CaseRead the following case situations and answer the questions that follow:onits Pokhara home office. The system receives current market prices and m focustomers to call up current quotes on terminals in the lobby. The equipment cosstraight linea screen or stores it for later retrieval by the firm's brokers. The system alsoprice at a 10 percent interest rate. The equipment is is depreciated onmethod over 4-year life. Expected salvage value is Rs 50,000. As an alternative totheleasing would be willing to write a 4-year lease on the equipment, includimaintenance, for payments of Rs 200,000 at the end of each year. Fewa's tax rate ipercent. You have been asked to analyze the lease-versus-purchase decision, and inprocess to answer the following questions:Who are the two parties to a lease transaction?Describe the various types of leases.1.What is Fewa's present value cost of leasing the equipment? What is the presevalue of cost of borrow and buy equipment? Would you recommend to purchasaor lease the asset?How do you treat repair and maintenance costs in lease versus purchase2.3.4.decision?and they are concerned that these plans may come to fruition prior to theexpiration of the lease. If the move occurs, Fewa would buy or lease an entirelynew set of equipment, and hence management would like to include a cancellationclause in the lease contract. What impact would such a clause have on theriskiness of the lease from Fewa's standpoint? From the lessor's standpoint? If youwere the lessor, would you insist on changing any of the lease terms if a5.Fewa's management has been considering moving to a new downtown locationcancellation clause were added?

Parties to lease transaction There are two parties to a lease transaction, namely, the lessor and…

nd in the Who are the two parties to a lease transaction? Describe the various types of leases. What is Fewa's present value cost of leasing the equipment? What is the prese value of cost of borrow and buy equipment? Would you recommend to purcha or lease the asset? How do you treat repair and maintenance costs in lease versus purcha decision? 4. 5. Fewa's management has been considering moving to a new downtown locatic and they are concerned that these plans may come to fruition prior to expiration of the lease. If the move occurs, Fewa would buy or lease an entire new set of equipment, and hence management would like to include a cancellati clause in the lease contract. What impact would such a clause havę on riskiness of the lease from Fewa's standnoint? Firoı were the lo 123

nd in the Who are the two parties to a lease transaction? Describe the various types of leases. What is Fewa's present value cost of leasing the equipment? What is the prese value of cost of borrow and buy equipment? Would you recommend to purcha or lease the asset? How do you treat repair and maintenance costs in lease versus purcha decision? 4. 5. Fewa's management has been considering moving to a new downtown locatic and they are concerned that these plans may come to fruition prior to expiration of the lease. If the move occurs, Fewa would buy or lease an entire new set of equipment, and hence management would like to include a cancellati clause in the lease contract. What impact would such a clause havę on riskiness of the lease from Fewa's standnoint? Firoı were the lo 123

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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When are initial direct costs recognized in an operating lease? In a direct financing lease? In a sales-type lease? Why?
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In the lease versus buy decision, leasing is often preferable Oa. because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset. Ob. because, generally, no down payment is required, and there are no indirect interest costs. Oc. because it has no effect on the firm's ability to borrow to make other investments. Od. because the lessee owns the property at the end of the least term. Oe. because lease obligations do not affect the firm's risk as seen by investors.
Part 1: New Lease Accounting – IFRS 16 Leases Effect Analysis. What are the top three industries most affected by IFRS 16 as measured by the present value of future payments for off-balance-sheet leases to total assets? Which leased assets propel them to the top three? Also, discuss the extent that smaller firms would be affected by IFRS 16. Which payments are to be included in the measurement of lease assets and lease liabilities? Also, discuss the pros and cons of excluding the following payments from the measurement. Variable lease payments linked to future use or sales Optional payments relating to lease-extension option when a lessee is not reasonably certain to exercise the option. Discuss the effects of the new accounting on the following items and ratios of lessees. Provide reason(s) behind all effects. EBITDA, operating profit, and profit before tax Operating cash flow, financing cash flow, and total cash flow Debt to equity, current ratio, and return on total assets
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $6,500,000. Because of radiation contamination, it actually will be completely valueless in four years. You can lease it for $1,865,000 per year for four years. Assume that the tax rate is 22 percent. You can borrow at 6 percent before taxes. Assume that the scanner will be depreciated as three-year property under MACRS. Use Table 10.7.
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Now suppose that, at the end of the lease term, Kimberly-Clark took good care of the asset and Sheffield agrees that the fair value of the asset is actually $10,500. Record the entry for Kimberly-Clark at the end of the lease to return control of the storage building to Sheffield (assuming the accrual of interest on the lease liability has already been made).