In this assignment, you need to review and provide answers to the questions related to Panache's financial statements.
You're feeling pretty good about Panache's financial statements and stop by Mr. Cartwright's office to let him know you're caught up.
"I'm glad you stopped by," Mr. Cartwright 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 Cartwright you'll check into it, and you head back to your office. In the file cabinet Ms. Brown used, you find a file labeled "Equipment Leases."
You remember that the last loan Panache took out was at an interest rate of 8%. You're sure the company could get that same rate again if it needed a loan. Panache 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:
| Assembly Equipment | Welding Equipment |
Yearly rental (paid at beginning of year) | $10,500 | $11,000 |
Lease term | 12 years | 10 years |
Estimated economic life | 20 years | 10 years |
Purchase option | No | $5,000 at end of lease |
Renewal option | No | No |
Fair market value at beginning of lease | $100,000 | $75,000 |
Cost of asset to lessor | $100,000 | |
Guaranteed residual value | None | $5,000 |
Unguaranteed residual value | None | None |
Executory costs | None | None |
Paid by Panache | $1,000 per year | None |
Paid by lessor (maintenance) | None | $1,000 per year (est.) |
Implicit rate of lessor | Not known | 8% |
Estimated fair market value at end of lease | $10,000 | $5,000 |
Date lease was entered into | January 1, 2015 | January 1, 2016 |
Next, you do some research into the types of leases Panache could offer to its customers. Finally, you are ready to write a memo to Mr. Cartwright about Panache's leases.
Write a 3 to 5-page memo to Mr. Cartwright. Include in your memo 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 Excel format, that would have been made at the inception of each lease and the journal entries that will be made for 2015.
- An evaluation of the types of leases that Panache could offer its customers and the effect of each type of lease on Panache's financial statements. Indicate which type of lease you would recommend for Panache, why you chose it, and the terms the leases would need to include to qualify as that type of lease.