Kabura Corporation can either lease or buy a small garage next to its business that will provide parking for its customers. The company can lease the building for a period of 12 years, which approximates the useful life of the facility and thus qualifies as a capital lease. The terms of the lease are payments of $24,000 per year for 12 years. Kabura currently is able to borrow money at a long-term interest rate of 9 percent. The company can purchase the building by signing a $160,000 long-term mortgage with monthly payments of $2,000. The 12-year mortgage also carries an interest rate of 9 percent.

REQUIRED

1. With regard to the lease option:

a. Calculate the present value of the lease. (Note: Round amounts to the nearest dollar.)

b. Prepare the journal entry to record the lease agreement.

c. Prepare the journal entry to record depreciation of the equipment for the first year using the straight-line method.

d. Prepare the journal entries to record the lease payments for the first two years.

2. With regard to the purchase option:

a. Prepare a monthly payment schedule showing the monthly payment, the interest for the month, the reduction in debt, and the unpaid balance for the first three months. (Note: Round amounts to the nearest dollar.)

b. Prepare the journal entries to record the purchase and the first two monthly payments.

3. Based on your calculations, which option seems to be best? Aside from cost, name an advantage and a disadvantage of each option.