Revaluation of leases. Sentry Inc. purchased for $2,300,000 in cash the net assets of New Equipment Leasing Company. The purchase was made on December 31, 20X1, at which time New Equipment had prepared the following balance sheet:
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New Equipment Leasing Company |
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Assets |
Liabilities and Equity |
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|
Current assets |
$100,000 |
Current liabilities |
$150,000 |
|
Assets under operating leases |
520,000 |
Obligation under capital lease of equipment |
35,000 |
|
Net investment in direct financing (capital leases) |
730,000 |
Common stock ($5 par) |
100,000 |
|
Leased equipment under capital lease (net) |
40,000 |
Paid in capital in excess of par |
400,000 |
|
Buildings (net) |
200,000 |
Retained earnings |
955,000 |
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Land |
50,000 |
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Total assets |
$1,640,000 |
Total liabilities and equity |
$1,640,000 |
The following information is available concerning the assets and liabilities of New Equipment:
a. Current assets and liabilities are stated fairly. No payments resulting from leases are included in current accounts, since all payments are due each December 31, and payment for 20X1 has been made.
b. Assets under operating leases have an estimated value of $580,000. This figure includes consideration of remaining rents and the value of the assets at the end of the lease terms.
c. The net investment in direct financing leases represents receivables at their discounted present values. All leases are written at the current market interest rate of 12%, except one equipment lease requiring payments of $50,000 per year for five remaining years. The $50,000 payments include interest at 8%.
d. The buildings and the land have appraised fair values of $400,000 and $100,000, respectively.
e. The leased equipment under the capital lease pertains to a computer used by New Equipment.
The obligation under the capital lease of equipment includes the present value of five remaining payments of $9,233 due at the end of each year and discounted at 10%. The current interest rate for this type of transaction is 12%. The fair value of the equipment under the lease is $60,000.
f. New Equipment has expended $100,000 on R&D leading to new equipment applications. Sentry estimates the value of this work to be $200,000.
g. New Equipment has been named in a $200,000 lawsuit involving an accident by a lessee using its equipment. It is likely that New Equipment will be found liable in the amount of $50,000.
Record the purchase of New Equipment Leasing Company by Sentry Inc. Carefully support your entry. You may assume that the price will allow goodwill to be recorded.