Financial Statement Reporting for an Operating Lease

Harmeling Paint Ball (HPB) Corporation needs a new air compressor that costs $80,000. HPB will need it for only 5 years even though the compressor's economic life is long enough so that the lease is an operating lease. The firm can lease the compressor for 5 years with $25,000 lease payments at the end of each year. HPB's cost of debt is 14%. Answer the following questions. (Hint: See Table 19-1.)

What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value.

$

What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent.

$

What will HPB report as the Year-1 lease expense? Round your answer to the nearest cent. Enter your answer as a positive value.

$

What is the Year-1 imputed interest expense? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value.

$

What lease liability must be reported at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value.

$

What right-of-use asset must be reported at Year 1? Do not round intermediate calculations. Round your answer to the nearest cent.

$

Question 2

Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply:

The machinery falls into the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.)

Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance.

The firm's tax rate is 25%.

The loan would have an interest rate of 16%. It would be nonamortizing, with only interest paid at the end of each year for four years and the principal repaid at Year 4.

The lease terms call for $410,000 payments at the end of each of the next 4 years.

Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $250,000 at the end of the 4th year.

What is the cost of owning? Enter your answer as a positive value. Do not round intermediate calculations. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar.

$

What is the cost of leasing? Enter your answer as a positive value. Do not round intermediate calculations. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar.

$

What is the NAL of the lease? Do not round intermediate calculations. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest dollar.

$