PAGE 13 Lease Versus Purchase Hollingsworth Corporation can

PAGE 13 Lease Versus Purchase Hollingsworth Corporation can either lease or buy a small garage next to its business. t will provide parking for its customers. The company can lease the building for a period of 12 years, which approximates the useful life of the facility and thus qualifies as a capital lease. The terms of the lease are payments of $24,000 for 12 years. Hollingsworth is currently able to borrow money at a long-term interest rate of 9 percent to lease. The company can purchase the equipment by signing a $180,000 long-term note with monthly payments of $2,000. The mortgage rate carries an interest rate of 12 percent. REQUIRED 1. With regard to the lease option: Calculate the present value ofthe lease. (Round to nearest dollar) b. Prepare the journal entry to record the lease agreement. c.Prepare the journal entry to record depreciation of the building for the first year using the straight-line method. d. Prepare the journal entries to record the lease payments for the first two years 2. With regard to the purchase option: a. Prepare a monthly payment schedule showing the monthly payment, the interest for the month, the reduction in debt, and the unpaid balance for the first three months. (Round to nearest dollar) (round interest rate to two decimal places) b. Prepare the journal entries to record the purchase and the first two monthly payments. 3. Based on your calculations, which option seems to be best? A one or two sentence answer will suffice.

Solution

Purchase option examined.

3. Based on the calculations , leasing is a better option, since the term is short and hence the interest outflow will be less. also the rate of interest is lower for leasing than the mortgage.

Month	Monthly payment	Interest for one month at 1% on the balance	Reduction in debt	Unpaid baance at the end of the period
0				180000
1	2000	1800	200	179800
2	2000	1798	202	179598
3	2000	1796	204	179394