3. Taunton Manufacturing Inc. is a machine shop in Taunton, Massachusetts. The firm recently leased a drill press for a 20-year term at payments of $9,000 per year payable at year end. No residual value was assumed in the lease which is clearly a financing lease. Taunton can borrow at 8% and will depreciate the press straight line over 20 years.

Shortly before the lease became effective, Taunton’s balance sheet was as follows:

Answer the following questions working in whole dollars but present balance sheet accounts rounded to the nearest $1,000.

a. Construct Taunton’s balance sheet showing the capitalized lease and the related lease obligation.

b. Calculate the firm’s debt ratio before and after the lease, and comment on the difference.

c. (Optional) Reconstruct the balance sheet at the end of the first year assuming the other accounts remain the same.

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Taunton Manufacturing Inc. Balance Sheet ($000) Current assets $ 35 Current liabilities $ 25 Fixed assets 315 Long-term debt 95 Total assets $350 Equity 230 Total liabilities & equity $350