Lease Versus Purchase
Consider the following terms:
• Annual payments, end of each year, $40,000
• 10 year useful life
• 10 percent borrowing rate
• Straight line benefit pattern
• Zero residual value
• Lease purchase
• Initial deposit upon signing agreement, $20,000, refundable upon satisfying all purchase terms
• Five year lease terms
• Lessor’s fair value of property, $170,000
Required
a. What lease terms should be changed to insure this purchase would be reported as a capital lease?
b. Using the accounting equation, show the first year’s financial statement impact of your revised terms, and compare it to the financial statement impact of the original terms.