Problem 4 (10 Points) – Lessors Accounting for (Leveraged?) Leases Today is Janu
ID: 2417800 • Letter: P
Question
Problem 4 (10 Points) – Lessors Accounting for (Leveraged?) Leases
Today is January 1, 2014. Help Me Health Care Company, a non-profit organization, is looking for a lessor to help them finance the acquisition of a Magnetic Resonance Imaging (MRI) machine. The machine sells for $ 2,000,000, and Help Me Health Care does not have the cash or the ability to borrow the money to finance the acquisition.
This is where you come in. You have $ 400,000 of cash, and you also have the ability to borrow $ 1,600,000 from a local bank. The bank would charge you 10% on the loan, with equal annual payments due on December 31 of each year through and including Dec. 31, 2023.
Help Me Health Care has agreed to lease the MRI machine, and is willing to pay
$ 210,000 at the end of each year for the next fifteen years.
For tax purposes, the MRI machine would be considered a property with a seven-year life. The machine is expected to have a salvage value of $ 600,000 at the end of the lease. Your tax rate is 40%, and there are no special provisions (e.g. Investment Tax Credits) available within the tax code.
QUESTION
Assume that you decide to serve as the lessor for Help Me Health Care. Using the information provided above, please prepare a table which indicates how much income you would report each year over the life of the lease in accordance with current U.S. GAAP.
IRS – ALLOWABLE DEPRECIATION AS A % OF COST
Year
3-Year
Property
5-Year
Property
7-Year
Property
10-Year
Property
1
33.33
20.00
14.29
10.00
2
44.45
32.00
24.49
18.00
3
14.81
19.20
17.49
14.40
4
7.41
11.52
12.49
11.52
5
-
11.52
8.93
9.22
6
-
5.76
8.92
7.37
7
-
-
8.93
6.55
8
-
-
4.46
6.55
9
-
-
-
6.56
10
-
-
-
6.55
11
-
-
-
3.28
12
-
-
-
-
Year
3-Year
Property
5-Year
Property
7-Year
Property
10-Year
Property
1
33.33
20.00
14.29
10.00
2
44.45
32.00
24.49
18.00
3
14.81
19.20
17.49
14.40
4
7.41
11.52
12.49
11.52
5
-
11.52
8.93
9.22
6
-
5.76
8.92
7.37
7
-
-
8.93
6.55
8
-
-
4.46
6.55
9
-
-
-
6.56
10
-
-
-
6.55
11
-
-
-
3.28
12
-
-
-
-
Explanation / Answer
EQUAL ANNUAL PAYMENT OF LOAN (0.1(1600000)/(1-(1+0.1)^-10) 260392.6318 YEAR OPENING BAL INTEREST @ 10% INSTALMENT PRINCIPAL IN INSTALMENT CLOSING BAL 1 1600000 160000 260392.6318 100392.6318 1499607.368 2 1499607.368 149960.7368 260392.6318 110431.895 1389175.473 3 1389175.473 138917.5473 260392.6318 121475.0845 1267700.389 4 1267700.389 126770.0389 260392.6318 133622.5929 1134077.796 5 1134077.796 113407.7796 260392.6318 146984.8522 987092.9435 6 987092.9435 98709.29435 260392.6318 161683.3375 825409.6061 7 825409.6061 82540.96061 260392.6318 177851.6712 647557.9349 8 647557.9349 64755.79349 260392.6318 195636.8383 451921.0965 9 451921.0965 45192.10965 260392.6318 215200.5222 236720.5744 10 236720.5744 23672.05744 260392.6318 236720.5744 0.000000002473825589 depreciation year opeining balance Percentage depreciation 1 2000000 14.29% 285800 2 24.49% 489800 3 17.49% 349800 4 12.49% 249800 5 8.93% 178600 6 8.92% 178400 7 8.93% 178600 8 4.46% 89200 INCOME TO BE REPORTED YEAR LEASE RENTAL SALVAGE VALUE TOTAL INCOME INTEREST ON LOAN DEPRECIATION INCOME BEFORE TAX tax @ 40% income 1 210000 0 210000 160000 285800 -235800 2 210000 0 210000 149961 489800 -429761 3 210000 0 210000 138918 349800 -278718 4 210000 0 210000 126770 249800 -166570 5 210000 0 210000 113408 178600 -82008 6 210000 0 210000 98709 178400 -67109 7 210000 0 210000 82541 178600 -51141 8 210000 0 210000 64756 89200 56044 22418 33627 9 210000 0 210000 45192 0 164808 65923 98885 10 210000 0 210000 23672 0 186328 74531 111797 11 210000 0 210000 0 0 210000 84000 126000 12 210000 0 210000 0 0 210000 84000 126000 13 210000 0 210000 0 0 210000 84000 126000 14 210000 0 210000 0 0 210000 84000 126000 15 210000 600000 810000 0 0 810000 324000 486000
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