Question
Trillium Ltd, a small and growing innovative start-up technology company traded on the Toronto Stock Exchange, leased machinery on January 1, 2020 for a term
Trillium Ltd, a small and growing innovative start-up technology company traded on the Toronto Stock Exchange, leased machinery on January 1, 2020 for a term of 10 years. The Company considered purchasing the machinery but instead opted to lease. The machinery is widely known to have a general life span of about 20 years.
At the date of signing the lease contract, the leased machinery and associated lease obligation were correctly recorded at $42,000. The first lease payment of $6,000 was made on December 31, 2020 and the interest rate inherent in the lease contract is 7%.
At the start of the year, the Company had a cash and retained earnings balance of $100,000. Assume the above was the only transaction in the year.
The Company has a December 31 year-end.
Required:
- For the year-ended December 1, 2020, prepare the relevant parts of the following financial statements:
- Statement of Financial Position
- Statement of Profit or Loss
- Explain, with support, two of the most likely reasons why this specific Company opted to lease the machinery rather than purchase it.
- Explain how the lease will affect Earnings-before-Interest-Taxes-Depreciation (EBITDA).
- Explain how the debt-to-equity ratio would be affected if the Company choose to borrow funds from a bank to purchase the machinery rather than leasing it. Be specific.
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