Felton Incorporated Is Considering Leasing Equipment

question 27

Essay

Felton Incorporated is considering leasing equipment. It can either lease that equipment for five or ten years with the same annual lease payments under either agreement. The five-year lease allows Felton to classify the lease as an operating lease. However, the ten-year lease requires Felton to classify the lease as a capital lease. If Felton desires to measure net income higher in the initial year of the lease agreement, which lease contract would you advise Felton to sign? Why?

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Definitions:

Charitable Contributions

Donations or gifts given by individuals or organizations to non-profit organizations, which can often be deducted from taxes.

AGI Limitation

Restrictions or phase-outs on certain tax deductions, credits, or exemptions based on the taxpayer's Adjusted Gross Income (AGI).

Churches

Religious organizations that may enjoy certain tax exemptions and benefits under IRS guidelines.

Investment Interest Expense

Interest paid on loans used to purchase taxable investments, potentially deductible up to the amount of net investment income.