The Carom Company plans to acquire, as of January 1, 1980, a computerized cash register system that costs \(\$ 100,000\) and that has a 5 -year life and no salvage value. The company is considering two plans for acquiring the system.

(1) Outright purchase. To finance the purchase, \(\$ 100,000\) of par-value 10 -percent semiannual coupon bonds will be issued January 1, 1980, at par.

(2) Lease. The lease requires five annual payments to be made on December 31, 1980, 1981. 1982, 1983, and 1984. The lease payments are such that they have a present value of \(\$ 100,000\) on January 1, 1980, when discounted at 10 percent per year.

Straight-line amortization methods will be used for all depreciation and amortization computations.

a Verify that the amount of the required lease payment is \(\$ 26,380\) by constructing an amortization schedule for the five payments. Note that there will be a \(\$ 2\) rounding error in the fifth year. Nevertheless, you may treat each payment as being \(\$ 26,380\) in the rest of the problem.

b What balance sheet amounts will be affected if plan (1) is selected? If plan (2) is selected, the lease is cancelable, and the operating-lease treatment is used? If plan (2) is selected, the lease is noncancelable, and the financing-lease treatment is used?

c What will be the total depreciation and interest expenses for the 5 years under plan (1)?

d What will be the total expenses for the 5 years under plan (2) if the lease is accounted for as an operating lease? As a financing lease?

e Why are the answers in part d the same? Why are the answers in part c different from those in part d?

f What will be the total expenses for the first year, 1980, under plan (1)? Under plan (2) accounted for as an operating lease? Under plan (2) accounted for as a financing lease?

g Repeat part f for the fifth year, 1984