Chapter 19, Problem 1MC

(1)

Summary Introduction

Case Summary:

LS Inc wants to acquire new market data and quotation system for its new home office. The system receives the information from online services and display the data onscreen or may save it for later retrieval and system also allow customers to make call and can convey current quotes. Cost of the equipment is $ 1,000,000 and if the company wants to purchase the equipment, they can borrow a loan at an interest rate of 10%.

Useful life of equipment is 6 years and it comes under 3 years MARCS class or it can purchase a contract of 4 years where $20,000 have to be paid at the beginning of each year and it will be sold after 4 years and the residual value is estimated at $200,000. They thought of opting for leasing which will cost $260,000 and includes maintenance cost. Federal plus state tax is 40%.

To identify: Parties to a lease transaction

(2)

Summary Introduction

To classify:

Primary types of leases and its characteristics

(3)

Summary Introduction

To classify:

The leases for tax purposes

(4)

Summary Introduction

To determine:

The effect of leasing on firm’s balance sheet

(5)

Summary Introduction

To determine:

The effect of leasing on firm’s capital structure