Lease vs$.$ Purchase $-$ Riverton Mining plans to purchase or lease $$220,000$ worth of excavation

equipment. If purchased, the equipment will be depreciated on a straight$-$line basis over five years,

after which it will be worthless. If leased, the annual lease payments will be $$55,000$ per year for five

years. Assume Riverton$$s borrowing cost is $8\%,$ its tax rate is $35\%,$ and the lease qualifies as a true

tax lease.

a$.$ If Riverton purchases the equipment, what is the amount of the lease$-$equivalent loan?

b$.$ Is Riverton better off leasing the equipment or financing the purchase using the lease equivalent

loan?

c$.$ What is the effective after$-$tax lease borrowing rate? How does this compare to Riverton$$s actual

after$-$tax borrowing rate?

$9\mathrm{.}8.$ Lease Financing

Bankers Group Inc., a financial consulting firm, signs a five$-$year lease for a computer system that requires

annual payments of $$10,000$ at the end of each year, starting in $2010.$ The effective interest rate on the lease

is $8\%.$

Required:

$1.$ If Bankers Group records the contract as an operating lease, journalize the accounting entries for the

different years,

$2.$ if Bankers Group chose to capitalize the lease, journalize the accounting entries for the different years.

$3.$ Contrast the two methods.