Stealth Sky Views (SSV) is a private company that operates tourist rides from St John s, Newfoundland. Tourists pay for a one-hour ride that takes them to Signal Hill and up the coast. Sam, the owner, has noticed a significant increase in his rider base and is now looking at expanding by purchasing a new plane. Sam is considering several finance options (Exhibit I ) and would like you, his accountant, to assist him.

Required

Provide Sam with a report that calculates each of the three financing options he has laid out, along with journal entries where requested. He would ideally like to minimize the amount of cash that he is required to repay over the next three years in order to cover operating costs. He would also like you to comment on the advantages and disadvantages of the various options. You may assume that the receipt of any cash and the purchase of the plane take place on January 1 and that SSV has a December 31 year end. The plane Sam wants to buy is expected to cost $500,000. The freight charges to deliver the plane will amount to $5,000 and the plane is expected to last 15 years with proper maintenance and will have a salvage value of $20,000. Sam depreciates his assets on a straight-line basis. Sam would like you to provide the initial recording of the asset. You may assume that payment will be some form of loan for this portion and that the $5,000 delivery will be paid in cash; in other words, it will not be part of the fi nancing. Sam would also like you to prepare the journal entry to record depreciation for the fi rst year.

Financing Option #1 Obtain a $500,000 loan from the Royal Bank of Ryan. The loan would be repayable in fi ve equal principal payments plus interest on December 31 of each year. The loan would carry an interest rate of 6%. Sam would like to see the entry for the receipt of the loan and the recording of the journal entries on December 31.