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    Aigrette: lease recommendation, welding assembly equipment

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    Review and provide answers to the questions related to Aigrette's financial statements.

    You're feeling pretty good about Aigrette's financial statements and stop by Mr. Morton's office to let him know you're caught up.

    "I'm glad you stopped by," Mr. Morton says. "I'm thinking about offering leases to our customers. I know we lease some of our equipment, so why shouldn't we provide that same option for the people who buy our cars? But I'm not sure how leases affect our financial statements. You'd better look into that for me, and let me know what you think."

    You tell him you'll check into it, and you head back to your office. In the file cabinet Ms. Koffler used, you find a file labeled "Equipment Leases."

    You remember that the last loan Aigrette took out was at an interest rate of 8%. You are sure the company could get that same rate again if they needed a loan. Aigrette uses straight-line depreciation for all equipment.

    You make some notes as you look through the documents, and here's what you have when you are done:

    (see the attachment for the table)

    Next, you do some research into the types of leases Aigrette could offer to its customers. Finally, you are ready to write a memo to Mr. Morton about Aigrette's leases.

    Based on your analysis of the information provided, create a memo for Mr. Morton that includes the following:
    An assessment of the assembly equipment and welding equipment leases that includes what type of lease each is.
    Embed the journal entries, in a Microsoft Excel worksheet, that would have been made at the inception of each lease and the journal entries that will be made for 2011.
    An evaluation of the types of leases that Aigrette could offer its customers and the effect of each type of lease on Aigrette's financial statements.
    Recommend the type of lease for Aigrette, why you chose it, and the terms the leases would need to include to qualify as that type of lease.
    Create the required journal entries in a Microsoft Excel worksheet and include a link to this in your document. Use the spreadsheet to present your analysis as well.

    Support your responses with examples.

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    Solution Preview

    The two sales leases are tested in excel to see if they are capital (see test results in Excel). The entries at inception and at the end of the first year for both leases are shown (in Excel).

    The reference to Panache was unclear so I assumed on the maintenance that this was the customer.
    For the welding equipment, the incremental borrowing rate would have valued the asset at higher than its fair value, which is not allowed. So, I had to solve for the implicit rate by forcing the present value to be the fair value (the maximum amount you can record). I used IRR to do this (see excel).

    If we sold using operating leases, we would retain the equipment on the balance sheet and show rental revenue equal to the rental payments. If we sold using a ...

    Solution Summary

    Your tutorial includes 445 word discussion and recommendation and four sections in Excel. Excel includes a test for type of lease, journal entries at inception, journal entries at the end of year one and an amortization schedule of the life of the capital lease (including imputing interest rate).