Chambers Leased Equipment to Montga Company on November I,2010 Montga Uses Straight-Line Depreciation for Its Property,plant,and Equipment

question 44

Essay

Chambers leased equipment to Montga Company on November I,2010.The terms of the lease are as follows:
$$\begin{array} { | l | l | } \hline \text { Lease term } & 10 \text { years } \\\hline \text { Economic life of leased asset } & 12 \text { year } \\\hline \text { Fair value of leased asset } & 104,000 \\\hline \text { Guaranteed residual value } & 10,000 \\\hline \text { Lease payments, due each Nov } 1 & 12,000 \\\hline \text { Lessee's incremental borrowing rate } & 5 \% \\\hline\end{array}$$ Montga uses straight-line depreciation for its property,plant,and equipment.
Requirements:
a.Prepare the journal entries for the lease from November 1 through December 31,2010.
b.You and the director of finance for Montga Company.You are concerned about the impact the lease will have on your key performance indicator,the total debt to total assets ratio.Discuss the impact the lease will have on this performance indicator.

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Definitions:

After-Tax Salvage Value

The net value of a disposed asset after accounting for any taxes incurred or savings on the salvage.

Financing Costs

Expenses incurred by a company in the process of raising funds, including interest payments, issuance costs of securities, and other related expenses.

Incremental Cash Flows

The additional cash flows from undertaking a project or investment.

NWC

Net Working Capital, which is calculated as current assets minus current liabilities, indicating the company's short-term financial health.