Discuss the relative impact of acquiring this asset under an operating lease versus a capital lease…

Ratio Effects: Lease Versus Purchase

Consider the following summary financial statements at the beginning of the period:

Current assets

$ 40,000

Current liabilities

$ 15,000

Other assets

110,000

Other liabilities

113,150

Capital stock

10,000

Retained earnings

11,850

Total

$150,000

Total

$150,000

Net income during the period (exclusive of the lease) was $35,000.Also assume the company entered into a lease with the following terms:

• Annual payments, end of each year, $30,000

• 12-year useful life

• Eight percent borrowing rate

• Straight-line benefit pattern

• Zero residual value

• Six-year lease term

• Lessor’s fair value of property, $240,000

Required

Use beginning balance sheet data to calculate the following requirements:

a. Calculate the return on equity (ROE) ratio at year-end and the financial leverage ratio for this company, assuming that this new asset is reported on the financial statements as a capital lease.

b. Calculate the return on equity (ROE) ratio and the financial leverage ratio for this company, assuming that this new asset is reported on the financial statements as an operating lease.

c. Discuss the relative impact of acquiring this asset under an operating lease versus a capital lease on these financial statements. Show the effects of each option, using the accounting equation.

 

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Discuss the relative impact of acquiring this asset under an operating lease versus a capital lease… was first posted on June 28, 2020 at 11:20 pm.
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