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The Mainor Sch ernative means of Buy the machim Buy the machin will repay the r

The Mainor Sch ernative means of Buy the machim Buy the machin will repay the r

FINANCIAL ACCOUNTING
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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How an acquisition is financed may dictate the annual reported expenditure. The Mainor School District is about to establish a 30-machine computer lab. It is considering six alternative means of acquiring and financing the machines: 1. Buy the machines outright; cost will be S60,000. 2. Buy the machines and finance them with a $60,000, three-year, 10 percent interest term note. The district will repay the note and pay the entire interest with a single payment of $79,860 when the note matures. 3. Buy the machines and finance them with a S60.000, three-year, 10 percent interest, installment note. The district will repay the note (plus interest) in three end-of-year installments of $24,127 each. 4. Lease the equipment but structure the lease so that it satisfies the criteria of a capital lease. The district will make three $24,127 end-of-year lease payments. a. The district estimates that the equipment has a useful life of three years. b. Determine the present välue (using a discount rate of 10 percent) of the cash payments under each option. c. Comment on any incentives that district officials might have either to spread out the payments over the three-year period (either by a lease or borrowing arrangement) or to postpone the full payment until the third year, rather than to pay for the computers entirely in the year of acquisition. d. Comment on any significant differences in how the six options would be accounted for in government-wide statements instead of governmental fund statements. How would each year's reported expense be determined?
Transcribed Image Text:How an acquisition is financed may dictate the annual reported expenditure. The Mainor School District is about to establish a 30-machine computer lab. It is considering six alternative means of acquiring and financing the machines: 1. Buy the machines outright; cost will be S60,000. 2. Buy the machines and finance them with a $60,000, three-year, 10 percent interest term note. The district will repay the note and pay the entire interest with a single payment of $79,860 when the note matures. 3. Buy the machines and finance them with a S60.000, three-year, 10 percent interest, installment note. The district will repay the note (plus interest) in three end-of-year installments of $24,127 each. 4. Lease the equipment but structure the lease so that it satisfies the criteria of a capital lease. The district will make three $24,127 end-of-year lease payments. a. The district estimates that the equipment has a useful life of three years. b. Determine the present välue (using a discount rate of 10 percent) of the cash payments under each option. c. Comment on any incentives that district officials might have either to spread out the payments over the three-year period (either by a lease or borrowing arrangement) or to postpone the full payment until the third year, rather than to pay for the computers entirely in the year of acquisition. d. Comment on any significant differences in how the six options would be accounted for in government-wide statements instead of governmental fund statements. How would each year's reported expense be determined?
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