Kartik Corporation Started Operations on March 1,2017

question 108

Essay

Kartik Corporation started operations on March 1,2017.It needs to acquire a special piece of equipment for its manufacturing operations.It is evaluating two options as follows.
Option 1: Lease the equipment for 5 years.Lease payments would be $12,000 per year,due at the beginning of each fiscal year (March 1).Kartik's incremental borrowing rate is 5%.There is no bargain purchase or renewal option.Kartik is responsible for all executory costs of operating the equipment.
Option 2: Purchase the equipment for $58,000 by borrowing the full purchase amount at 4% over 5 years.This price is considered the fair value of the equipment.Payments are due at the end of each fiscal year (February 28).
The equipment has a useful life of 5 years and would be depreciated on a straight-line basis.No residual value is expected to exist at the end of 5 years.
Required:
a.Calculate the present value of the lease payments (Option 1).
b.Calculate the payment that would be required under the purchase option (Option 2).
c.Calculate and briefly discuss the financial impact of each option on the non-current assets,total liabilities,and net income of Kartik for the first year of operations.Assume all payments were made when due.Show your calculations.

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Definitions:

Adhesive Molecule

Molecules that participate in binding or sticking cells together, playing critical roles in cell signaling and structural integrity.

Ground Substance

An amorphous gel-like substance surrounding the cells within the extracellular matrix of connective tissues, providing support and mediating communication between cells.

Stem Cell

Stem Cells are undifferentiated cells with the potential to develop into different cell types, used in medical research for their regenerative properties.

Differentiate

The process by which cells or tissues undergo a change from a generalized to a more specialized form or function.