NOTE: the Following Problem Requires Present Value Information

question 33

Essay

NOTE: The following problem requires present value information.
On January 1, 2012, Porter Corporation signed a five-year noncancelable lease for certain machinery. The terms of the lease called for:
A) Porter to make annual payments of $60,000 at the end of each year (starting on Dec. 31, 2012) for five years. Porter must return the equipment to the lessor end of this period.
B) The machinery has an estimated useful life of 6 years and no expected salvage value.
C) Porter uses the straight-line method of depreciation for all of its fixed assets.
D) Porter’s incremental borrowing rate is 8%.
E) The fair value of the asset at January 1, 2012 is $275,000.


Required:
1. Discuss whether Porter should account for the lease as an operating or capital lease and why.
2. Using the above information determine how the lease would affect Porter’s financial statements in 2013. Use the balance sheet equation below to show the effects.


C + N$A = L + CC + AOCI + RE

• A) Porter to make annual payments of $60,000 at the end of each year (starting on Dec. 31, 2012) for five years. Porter must return the equipment to the lessor end of this period.
• B) The machinery has an estimated useful life of 6 years and no expected salvage value.
• C) Porter uses the straight-line method of depreciation for all of its fixed assets.
• D) Porter’s incremental borrowing rate is 8%.
• E) The fair value of the asset at January 1, 2012 is $275,000.
• Required:
• 1. Discuss whether Porter should account for the lease as an operating or capital lease and why.
• 2. Using the above information determine how the lease would affect Porter’s financial statements in 2013. Use the balance sheet equation below to show the effects.
• C + N$A = L + CC + AOCI + RE

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Definitions:

Homogeneous Oligopolists

Firms in an oligopoly that sell products so similar that consumers perceive them as identical, leading to competition based primarily on price.

Differentiated Oligopolists

Firms in an oligopolistic market structure that distinguish their products from those of competitors through branding, quality, or other means.

Collusive Oligopoly

A market situation where a few firms dominate the market and make coordinated efforts to control prices and market shares, often illegally or in violation of competitive practices.

Noncollusive Oligopoly

A market structure where a few dominant firms compete without any explicit agreements to fix prices or market shares, often leading to intense competition.