What would the depreciation and interest expense be for year

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Reference no: EM132816007

Question 1: What would the depreciation and interest expense be for year (2021 and 2022) and in total (over the life of the transaction) under the purchase option?

Question 2: Amortization and interest expense for each year (2021 and 2022) and in total (over the life of the transaction) under the lease option assuming the lease is classified as a finance lease? (2a) What would the related expenses be if the lease is classified as an operating lease?

Question 3: Are the total expenses over the life of the transaction the same under all three possibilities (purchase, finance lease, operating lease)? How come?

Scott Brands plans to acquire, as of January 1, 2021, a new asset that costs $250,000, has a two-year life and no salvage value. The company is considering two options for acquiring the asset:

(a) Outright purchase.

To finance the purchase, the company will issue (on January 1, 2021)

$250,000 of par-value, 10% coupon bonds, at par. All payments are made on the last day of the year. The bonds mature in two years (December 31, 2022).

(b) Lease.

The lease requires two equal annual payments on December 31, 2021 and 2022. The lease payments are such that they have a present value of $250,000 on January 1, 2021, when discounted at 10 percent per year.

Scott Brands is under a US GAAP regime, and will use the straight-line depreciation (or amortization) method for the asset.

Reference no: EM132816007

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