Question
Assume that Starbucks Corp. would like to lease equipment for 6 years. Starbucks has the following two options: a. The company can sign a short-term
Assume that Starbucks Corp. would like to lease equipment for 6 years. Starbucks has the following two options:
a. The company can sign a short-term lease and renew the lease each year. The first annual lease payment would be $12,000,000 and the lease payments would increase by 4% each year after the first year.
b. The company can sign a lease for 6 years that would qualify as a finance/capital lease. The lease payment would be $12,000,000 per year and would not increase during the lease term.
The lease payments are made at the end of the year. The useful life of the equipment is 6 years and the equipment has no salvage value. Starbucks has an incremental borrowing rate of 6% and uses the straight-line method of depreciation.
Calculate/answer the following related to the lease:
i. Calculate any interest expense, amortization (depreciation) expense, and lease expense that would be reported under the two options. Determine the net asset balance, and lease liability balance that would be shown on the financial statements.
ii. Compare the impact of the two lease options on Starbucks income statement, balance sheet, and cash flow statement.
iii. Explain how each option would affect ROA and ROE?
iv. Which option would you choose? Why?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started