CASE 13-1 Capital versus Operating Leases On January 2, 2017, two identical companies, Daggar Corp Required and Bayshore Company, lease similar assets with the following a Determine earnings (i) before interest and taxes and (ii) before taxes for both firms. Identify the source of any differences bet 1. The economic life is eight years. 2. The term of the lease is five years. 3. b. Compute any deferred taxes resulting from the lease for each c. Compute the effect of the lease on the 2017 reported cash from d. Compute the effect of the lease on 2017 reported cash ween the companies. firm in the first year of the lease. operations for both firms. Explain any differences flows from investing activities for both firms. Explain any Lease payment of $20.000 per year is due at the beginning of each year beginning January 2, 2017 4. The fair market value of the leased property is $96,000. differences. 5. Each firm has an incremental borrowing rate of 8 percent and e. Compute the effect of the lease on 2017 reported cash a tax rate of 40 percent flow from financing activities for both firms. Explain any differences. Neither company has early adopted the new lease standard, records the lease as an operating lease. Both firms depreciate assets by the straight-line method, and both treat the lease as an operating lease f. Compute the effect of the lease on total 2017 cash flows for and Daggar capitalizes the lease, whereas Bayshore both companies. Explain any differences. g. Give reasons why Daggar and Bayshore might have wanted to use different methods to report similar transactions. for federal income tax purposes