You Work for a Nuclear Research Laboratory That Is Contemplating

question 6

Multiple Choice

You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment) . The scanner costs $2 million and it would be depreciated straight-line to zero over 4 years. Because of radiation contamination, it will actually be completely valueless in 4 years. You can lease it for $600,000 per year for 4 years. Assume your company does not contemplate paying taxes for the next several years. You can borrow at 6 percent before taxes. What is the net advantage to leasing from your company's standpoint?

• A)-$82,711
• B)-$79,063
• C)-$21,409
• D)-$20,818
• E)-$18,315

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Definitions:

Allowance for Doubtful Accounts

A contra-asset account that reduces the total receivables reported on the balance sheet to reflect the amount expected to be uncollectible.

Accounts Receivable

Money owed to a company by its customers for goods or services sold on credit.

Allowance Method

An accounting technique that estimates and records bad debts expense from credit sales based on historical data and analyses.

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts is a contra-asset account that reduces the total receivables on the balance sheet to reflect the amount that is not expected to be collected.