On January 2, 2014, two identical companies, Daggar Corp. and Bayshore Company, lease similar assets with the following characteristics:

1. The economic life is eight years.

2. The term of the lease is five years.

3. Lease payment of $20,000 per year is due at the beginning of each year beginning

January 2, 2008.

4. The fair market value of the leased property is $96,000.

5. Each firm has an incremental borrowing rate of 8 percent and a tax rate of 40 percent.

Daggar capitalizes the lease, whereas Bayshore 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 for federal income tax purposes.

Required:

4. Compute the effect of the lease on 2014 reported cash flows from investing activities

for both firms. Explain any differences.

5. Compute the effect of the lease on 2014 reported cash flow from financing activities

for both firms. Explain any differences.

6. Compute the effect of the lease on total 2014 cash flows for both companies. Explain

any differences.

7. Give reasons why Daggar and Bayshore might have wanted to use different methods

to report similar transaction