Principles Of Taxation For Business And Investment Planning 2020 Edition
23rd Edition
ISBN: 9781259969546
Author: Sally Jones, Shelley C. Rhoades-Catanach, Sandra R Callaghan
Publisher: McGraw-Hill Education
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Chapter 7, Problem 4TPC
To determine
Calculate NPV of both alternative and identify the best alternative that Company K should choose.
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unland Co. processes jam and sells it to the public. Sunland leases equipment used in its production processes from Splish Brothers, Inc. This year, Sunland leases a new piece of equipment from Splish Brothers. The lease term is 5 years and requires equal rental payments of $ 12,000 at the beginning of each year. In addition, there is a renewal option to allow Sunland to keep the equipment one extra year for a payment at the end of the fifth year of $ 12,000 (which Sunland is reasonably certain it will exercise). The equipment has a fair value at the commencement of the lease of $ 65,422 and an estimated useful life of 7 years. Splish Brothers set the annual rental to earn a rate of return of 4%, and this fact is known to Sunland. The lease does not transfer title, does not contain a bargain purchase option, and the equipment is not of a specialized nature.
Sunland Co. processes jam and sells it to the public. Sunland leases equipment used in its production processes from Splish Brothers, Inc. This year, Sunland leases a new piece of equipment from Splish Brothers. The lease term is 5 years and requires equal rental payments of $12,000 at the beginning of each year. In addition, there is a renewal option to allow Sunland to keep the equipment one extra year for a payment at the end of the fifth year of $12,000 (which Sunland is reasonably certain it will exercise). The equipment has a fair value at the commencement of the lease of $65,422 and an estimated useful life of 7 years. Splish Brothers set the annual rental to earn a rate of return of 4%, and this fact is known to Sunland. The lease does not transfer title, does not contain a bargain purchase option, and the equipment is not of a specialized nature.
How should Sunland classify this lease?
Findley Furniture Company must install $6.1 million of new equipment in one of its plants. It can obtain a bank loan for 100% of the required amount. Alternatively, management believes it can arrange a lease. Assume that the following facts apply: The equipment falls in the MACRS 5-year class. The applicable MACRS rates are 19%, 34%, 18%, 13%, 12%, and 4%. The lease includes maintenance, whereas if the equipment is purchased, it would require maintenance provided by a service contract for $160,000 per year, payable at the end of the year. Findley’s federal-plus-state tax rate is 30%. If the money is borrowed, the bank loan will be at a rate of 8%, amortized in 5 equal installments to be paid at the end of each year. The tentative lease terms call for end-of-year payments of $1.40 million per year for 5 years. At the end of the lease term, the equipment will have an estimated salvage value of $950,000. At that time, Findley plans to replace the equipment regardless of whether the firm…
Chapter 7 Solutions
Principles Of Taxation For Business And Investment Planning 2020 Edition
Ch. 7 - Prob. 1QPDCh. 7 - Assume that Congress enacted legislation requiring...Ch. 7 - Prob. 3QPDCh. 7 - To what extent do cost recovery deductions based...Ch. 7 - Can a firm have a negative tax basis in an asset?Ch. 7 - Prob. 6QPDCh. 7 - Corporation J manufactures electrical appliances....Ch. 7 - Identify the tax and nontax issues that firms must...Ch. 7 - Identify four possible differences in the...Ch. 7 - Prob. 10QPD
Ch. 7 - Prob. 11QPDCh. 7 - Prob. 12QPDCh. 7 - Prob. 13QPDCh. 7 - Prob. 14QPDCh. 7 - Prob. 15QPDCh. 7 - Prob. 16QPDCh. 7 - Prob. 17QPDCh. 7 - Prob. 18QPDCh. 7 - Prob. 1APCh. 7 - Assuming a 21 percent tax rate, compute the...Ch. 7 - Determine the tax basis of the business asset...Ch. 7 - ABC Company purchased business property several...Ch. 7 - Early this year, ZeZe Inc. paid a 52,000 legal fee...Ch. 7 - In year 1, Firm A paid 50,000 cash to purchase a...Ch. 7 - Prob. 7APCh. 7 - Hansen Company, a cash basis taxpayer, paid 50,000...Ch. 7 - In year 0, Jarmex paid 55,000 for an overhaul of a...Ch. 7 - Prob. 10APCh. 7 - Refer to the facts in problem 10. In its second...Ch. 7 - In its first year of operations, Lima Company...Ch. 7 - Prob. 13APCh. 7 - Herelt Inc., a calendar year taxpayer, purchased...Ch. 7 - Knute Company purchased only one asset during its...Ch. 7 - Prob. 16APCh. 7 - Suber Inc., a calendar year taxpayer, purchased...Ch. 7 - Prob. 18APCh. 7 - Prob. 19APCh. 7 - On May 12, 2018, Nelson Inc. purchased eight...Ch. 7 - In March 2018, Jones Company purchased a Mercedes...Ch. 7 - Margo, a calendar year taxpayer, paid 580,000 for...Ch. 7 - In 2019, Firm L purchased machinery costing 21,300...Ch. 7 - In 2018, Company W elected under Section 179 to...Ch. 7 - Prob. 25APCh. 7 - At the beginning of its 2019 tax year, Hiram owned...Ch. 7 - In April 2019, Lenape Corporation completed...Ch. 7 - Ajax Inc. was formed on April 25 and elected a...Ch. 7 - Prob. 29APCh. 7 - Mr. Z, a calendar year taxpayer, opened a new car...Ch. 7 - Prob. 31APCh. 7 - Prob. 32APCh. 7 - Prob. 33APCh. 7 - Prob. 34APCh. 7 - Prob. 35APCh. 7 - Prob. 36APCh. 7 - Prob. 37APCh. 7 - Prob. 1IRPCh. 7 - Prob. 2IRPCh. 7 - Prob. 3IRPCh. 7 - Prob. 4IRPCh. 7 - Prob. 5IRPCh. 7 - Prob. 6IRPCh. 7 - Prob. 7IRPCh. 7 - Prob. 8IRPCh. 7 - Prob. 9IRPCh. 7 - Prob. 10IRPCh. 7 - Prob. 1RPCh. 7 - Prob. 2RPCh. 7 - Prob. 3RPCh. 7 - Prob. 4RPCh. 7 - Prob. 1TPCCh. 7 - Prob. 2TPCCh. 7 - Prob. 3TPCCh. 7 - Prob. 4TPC
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- Jelly Co. processes jam and sells it to the public. Jelly leases equipment used in its production processes from Squishy, Inc. This year, Jelly leases a new piece of equipment from Squishy. The lease term is 5 years and requires equal rental payments of $15,000 at the beginning of each year. In addition, there is a renewal option to allow Jelly to keep the equipment one extra year for a payment at the end of the fifth year of $10,000 (which Jelly is reasonably certain it will exercise). The equipment has a fair value at the commencement of the lease of $76,024 and an estimated useful life of 7 years. Squishy set the annual rental to earn a rate of return of 5%, and this fact is known to Jelly. The lease does not transfer title, does not contain a bargain purchase option, and the equipment is not of a specialized nature. How should Jelly classify this lease?arrow_forwardJelly Co. processes jam and sells it to the public. Jelly leases equipment used in its production processes from Squishy, Inc. This year, Jelly leases a new piece of equipment from Squishy. The lease term is 5 years and requires equal rental payments of $15,000 at the beginning of each year. In addition, there is a renewal option to allow Jelly to keep the equipment one extra year for a payment at the end of the fifth year of $10,000 (which Jelly is reasonably certain it will exercise). The equipment has a fair value at the commencement of the lease of $76,024 and an estimated useful life of 7 years. Squishy set the annual rental to earn a rate of return of 5%, and this fact is known to Jelly. The lease does not transfer title, does not contain a bargain purchase option, and the equipment is not of a specialized nature. Which of the 5 lease tests does the lease qualify as a finance lease for? Choose all that apply. Transfer of Ownership Test [Select ] Bargain Purchase Option Test […arrow_forwardBev's Beverages is negotiating a lease on a new piece of equipment that would cost $74,000 if purchased. The equipment falls into the MACRS 3-ycar class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $32,500. A maintenance contract on the equipment would cost $3,100 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $18,600 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 9.4%. If there is a positive Net Advantage to Leasing, then the firm will lease the equipment. Otherwise, the firm will buy it. What is the NAL? (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and…arrow_forward
- Sunland Co. processes jam and sells it to the public. Sunland leases equipment used in its production processes from Carla Vista, Inc. This year, Sunland leases a new piece of equipment from Carla Vista. The lease term is 5 years and requires equal rental payments of $12,000 at the beginning of each year. In addition, there is a renewal option to allow Sunland to keep the equipment one extra year for a payment at the end of the fifth year of $12,000 (which Sunland is reasonably certain it will exercise). The equipment has a fair value at the commencement of the lease of $65,422 and an estimated useful life of 7 years. Carla Vista set the annual rental to earn a rate of return of 4%, and this fact is known to Sunland. The lease does not transfer title, does not contain a bargain purchase option, and the equipment is not of a specialized nature. Click here to view factor tables. How should Sunland classify this lease? Sunland should classify the lease as a/an lease.arrow_forwardA major property developer is concerned about lack of sales due to local economic conditions. To ensure that his condos are occupied, he offers a lease-to-purchase program in which, if people sign a lease by the end of March, they will not have to start making payments until March of the following year. The purchase price of the condo is $186,000. Payments of $1132.03 will be required at the beginning of each month over a 25-year amortization period. If interest is 5.67% compounded semi-annually during the first year, what is the semi-annually compounded interest rate during the payment period? The interest rate during the payment period is enter your response here _ _% compounded semi-annually. (Round the final answer to two decimal places. Round all intermediate values to six decimal places as needed.)arrow_forwardA major property developer is concerned about lack of sales due to local economic conditions. To ensure that his condos are occupied, he offers a lease-to-purchase program in which, if people sign a lease by the end of March, they will not have to start making payments until March of the following year. The purchase price of the condo is $186,000. Payments of $1132.03 will be required at the beginning of each month over a 25-year amortization period. If interest is 5.67% compounded semi-annually during the first year, what is the semi-annually compounded interest rate during the payment period? The interest rate during the payment period is enter your response here _ _% compounded semi-annually. (Round the final answer to two decimal places. Round all intermediate values to six decimal places as needed.). Please give me only correct answer. Someone give me incorrect answer. I will really upvote. Thanksarrow_forward
- An electric company must decide between two options for managing the blowdown water from its cooling tower. Option 1 is to continue the lease on 50 acres of land for another 5-year period and dispose of the water by spray irrigation. The landowner will move the pipe around as necessary and maintain the spray nozzles and valves. The previous lease cost $125,000 per year with payments due midway through each year. Now the landowner will require beginning of year payments of $180,000 each year. Option 2, which releases the 50 acre tract of land, involves purchasing a treatment system that will allow the recycling of most of the blowdown water. This system will have an initial cost of $1,600,000 and an AOC of $58,000 per year. However, the company will save $220,000 per year because it will not have to purchase as much make-up water as with option 1. At the end of 5 years, the company will be able to sell the equipment back to the local equipment supplier for 30% of the first cost. If the…arrow_forwardAn owner of the Atrium Tower Office Building is currently negotiating a five-year lease with ACME Consolidated Corporation for 20,000 rentable square feet of office space. ACME would like a base rent of $15 per square foot with step-ups of $1 per year beginning one year from now. ATRIUM would provide ACME a $53,000 moving allowance and $130,000 in tenant improvements (TIs). What is the effective rent (per SF) assuming a discount rate of 10%?arrow_forwardMarin Company is negotiating to lease a piece of equipment to MTBA, Inc. MTBA requests that the lease be for 9 years. The equipment has a useful life of 10 years. Marin wants a guarantee that the residual value of the equipment at the end of the lease is at least $7,000. MTBA agrees to guarantee a residual value of this amount though it expects the residual value of the equipment to be only $2,000 at the end of the lease term.If the fair value of the equipment at lease commencement is $75,000, what would be the amount of the annual rental payments Marin demands of MTBA, assuming each payment will be made at the beginning of each year and Marin wishes to earn a rate of return on the lease of 6%?arrow_forward
- The Platinum Company is a national mattress manufacturer. Its Marion plant will become idle on December 31, 2020. Nina Simon, the corporate controller, has been asked to look at three options regarding the plant:Option 1:The plant can be leased to the Coil Corporation, one of Platinum's suppliers, for 3 years. Under the lease terms, Coil would pay Platinum $220,000 rent per year (payable at year-end) and would grant Platinum a $64,000 annual discount from the normal price of coils purchased by Platinum. (Assume that the discount is received at year-end for each of the 3 years.) Coil would bear all of the plant's ownership costs. expects to sell this plant for $320,000 at the end of the 3-year lease.Option 2:The plant could be used for 3 years to make mattress covers as an accessory to be sold with a mattress. Fixed overhead costs (a cash outflow) before any equipment upgrades are estimated to be $18,000 annually for the 3-year period (assume the fixed costs occur…arrow_forwardBlossom Leasing Company leases a new machine to Sharrer Corporation. The machine has a cost of $65,000 and fair value of $96,000. Under the 3-year, non-cancelable contract, Sharrer will receive title to the machine at the end of the lease. The machine has a 3-year useful life and no residual value. The lease was signed on January 1, 2020. Blossom expects to earn an 8% return on its investment, and this implicit rate is known by Sharrer. The annual rentals are payable on each December 31, beginning December 31, 2020. Prepare an amortization schedule that would be suitable for both the lessor and the lessee and that covers all the years involved. Prepare the journal entry at commencement of the lease for Blossom Prepare the journal entry at commencement of the lease for Sharrer. Prepare the journal entry at commencement of the lease for Sharrer, assuming (1) Sharrer does not know Blossom’s implicit rate (Sharrer’s incremental borrowing rate is 9%), and (2) Sharrer incurs…arrow_forwardWildhorse Limited, a public company following IFRS, decided to upgrade the coffee machines in all of its office locations. Wildhorse leased 45 machines from Coffee Tyme Ltd. on July 1, 2023. (To purchase the coffee machines instead would have cost Wildhorse $315 per machine, and the machines would have lasted an estimated five years.) The lease calls for semi-annual payments for the next three years, in the amount of $30 per machine. The payments start on July 1, 2023. At the end of the three-year period, the machines will have to be returned to the lessor. Prepare the entry for the first payment on July 1, 2023. (List debit entry before credit entry. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts.) Date Account Titles and Explanation Debit Credit July 1 Would the entry for the first payment differ if Wildhorse followed ASPE? The entry ☑…arrow_forward
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