Lease Versus purchase

p5.Wooster Corporation can either lease or buy a small garage next to its business that will provide parking for its customers. The company can lease the building for a period of 12 years, which approximates the useful life of the facility and thus qualifies as a capital lease. The terms of the lease are payments of $24,000 per year for 12 years. Wooster currently is able to borrow money at a long-term interest rate of 9 percent. The company can purchase the building by signing an $160,000 long-term mortgage with monthly payments of $2,000. The mortgage also carries an interest rate of 9 percent.

ReQUIReD

1. With regard to the lease option:

a. Calculate the present value of the lease. (Round to the nearest dollar.)

b. Prepare the journal entry to record the lease agreement.

c. Prepare the journal entry to record depreciation of the building for the first year using the straight-line method.

d. Prepare the journal entries to record the lease payments for the first two years.

2. With regard to the purchase option:

a. Prepare a monthly payment schedule showing the monthly payment, the inter- est for the month, the reduction in debt, and the unpaid balance for the first three months. (Round to the nearest dollar.)

b. Prepare the journal entries to record the purchase and the first two monthly payments.

3.Business appliCationBased on your calculations, which option seems to be best? Aside from cost, name an advantage and a disadvantage of each option.

P5. Lease Versus Purchase 1. a. Present value calculated. Periodic Payment Factor (Table 2 in Appendix B: 9%, 12 periods) = Present Value of Lease b. = Capital Lease Equipment Capital Lease Obligations To record the lease contract c. Depreciation Expense, Capital Lease Equipment Accumulated Depreciation, Capital Lease Equipment To record depreciation on leased equipment for first year $171,864 d. Year 1 / 12 years = Interest Expense Capital Lease Obligations Cash Made lease payment for first year $171,864 Year 2 0.09 = Interest Expense Capital Lease Obligations Cash Made lease payment for second year ( ) = 2. a. Month Monthly Payment Interest for 1 Month at 0.75% on Unpaid Balance Reduction in Unpaid Balance at End Debt of Period 0 $160,000 1 $2,000 2 2,000 3 2,000 *Rounded P5. Lease Versus Purchase (Concluded) b. Building Mortgage Payable Purchased building by signing a mortgage Month 1 Made first monthly payment on mortgage Month 2 Made second monthly payment on mortgage 3