Assume a Machine That Has a Useful Life of Only

question 30

Multiple Choice

Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is
Expected to be $2,300. If the firm finds it can borrow funds at an interest rate of 10 percent, the firm
Should

• A) not purchase the machine, because the expected rate of return exceeds the interest rate.
• B) not purchase the machine, because the interest rate exceeds the expected rate of return.
• C) purchase the machine because the expected rate of return exceeds the interest rate.
• D) purchase the machine because the interest rate exceeds the expected rate of return.

Recognize how initial direct costs are handled in operating leases.

Understand the classification and accounting treatment of finance leases vs. operating leases.

Appreciate the significance of fair value measurement at the inception of a lease.

Learn the disclosure requirements for lessees and lessors under AASB 16/IFRS 16.

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Definitions:

Norris-LaGuardia Act

A 1932 U.S. federal law that limited the power of courts to issue injunctions against non-violent labor disputes and upheld workers' right to strike.

Unemployment Compensation

is financial support provided by the government or a fund to unemployed workers who meet certain eligibility requirements.

The States

Colloquially refers to the United States of America or, in a broader sense, to the individual states that constitute the federal union.

ERISA

The Employee Retirement Income Security Act, a federal law that sets minimum standards for pension plans in private industry to protect individuals in these plans.