You Are Analyzing the Balance Sheet of a Large Manufacturing

question 84

Essay

You are analyzing the balance sheet of a large manufacturing company and come across the followin account in the property, plant and equipment section:
Equipment acquired under finance lease = $400,000
The footnotes indicate that the lease was signed three years ago, that there are several years left in the finance lease, and that the equipment reverts to the lessor at the end of the lease term.The reporting company does not use the accumulated depreciation account for assets under finance leases.
Explain (a)what this account and (b)amount means, and (c)how it came to be included as a long-term asset.

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Definitions:

Support Department Costs

Expenses incurred by service departments that assist other units of a business, not directly involved in production.

Single Investment Application Rate

A metric used to assess the potential return on an individual investment to determine its profitability or effectiveness.

Overhead Application

The process of assigning or allocating overhead costs to produced goods or services, often using a predetermined overhead rate.

Activity-Based Management Method

The activity-based management method is a technique that uses detailed information about activities and their costs to manage and improve business processes.