Accounting Case Study: Leases
DaVinci Case Study
you will answer ONLY the 6 questions - ONLY QUESTIONS 1-6.
You are responsible for organizing your answers in a manner that makes it efficient for me to read and understand. In situations where numeric answers are required, it is up to you how much or how little to show me in terms of calculations. If you show me too little and you get the answer wrong, you will receive less credit. On the other hand, if you show me a bunch of messy calculations on the back of a napkin, you are not likely to get partial credit either if your answer is wrong. Bottom line, you are going to need to determine the audience (me) and how to present that information in an organized and readable format. If it is a question that does not have a numeric answer but asks you to make a qualitative assertion, you need to answer in paragraphs (more than one is optional) with complete sentences, correct grammar and spelling. This is not an exercise in texting. Again, you need to take whatever time and space is necessary to answer the question. I will warn you that no answer can be reduced to one sentence and that more than 3 pages per question will NOT be read. The once exception is Question 13. This will require a multiple paragraph, multiple page answer that will need an essay format. It should have a clear beginning, middle, and end. There should be transitions between paragraphs, be spelled correctly and have correct grammatical structure. In the past, the best presentations have been done by having an individual worksheet for each problem in a spreadsheet. For the last question, a separate word document would be submitted. This presentation is something to consider. In addition, also consider the fact that I am reviewing a LOT of these. If you are unclear or imprecise, or don't adequately explain what you did or how you came up with a number in a solution, I am not likely to look favorably on the answer.....
You may do research on the Internet (and you should). However, all work must be your own and any information taken from others should be appropriately cited.
Accounting Case Study: Leases
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Question One
In order to find the total amount paid at the end of 36 months, we multiply 36*6874.10 = 2, 4742, 715.60. This value is inclusive of the interest incurred by hospital for the three years. Therefore, to find the interest we subtract future value of the machine from the purchase price. 2,474,715.60 -2,000,000 = 474,715.60.
Interest can be calculated using the following formula
The interest paid is 15.76
Question Two
Considering that the rate of interest for the lessee is 15.76, I would advise the hospital against leasing the property. This owes to the reality that the reality that the hospital will not control the property, will incur additional tax, in addition to the fact that the long term costs for the lease will be expensive than a purchase. However, the hospital can still proceed to lease the machine after considering the following options. The hospital will conserve the working capital, would maintain their clients, and considering the cash flow.
Question Three
It is critical that capital leases and operating leases have different characteristics. For example, capital leases must include a transfer of ownership, have a bargain purchase option, have a lease term that is greater than or equal to 75% the economic life of the leased property. In contrast, operating leases have traits such as transfer of ownership, a minimum lease payment that is greater than 90% of fair value of the leased property, and have a lease term that is greater than or equal to 7...
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