Crumple\'s Car Rentals is planning to expand into the western part of the United
ID: 2422513 • Letter: C
Question
Crumple's Car Rentals is planning to expand into the western part of the United States and needs to acquire approximately 400 additional automobiles for rental purposes. Because Crumple's cash reserves were substantially depleted in replacing the bumpers on existing automobiles with new "fashion plate" bumpers, the expansion funds must be acquired through other means. Crumple's management has identified three options:
1. Issue additional debt
2. Create a wholly owned leasing subsidiary that would borrow the money with a guarantee for payment from Crumple. The subsidiary would then lease the cars to the parent.
3. Create a trust that would borrow the money with a guarantee for repayment from Crumple and lease the cars to it. In th event of liquidation, the residual value of the trust would go to the Historical Preservation Society of Pleasantville.
The acquisition price of the cars is approximately the same under all three alternatives.
Required
a. You have been asked to compare and contrast the three alternatives from the perspective of: (1) The impact on Crumple's consolidated balance sheet, (2) Their legal ramifications, and (3) The ability to control the maintenance, repair, and replacement of automobiles.
b. You are to consider any alternatives that might be used in acquiring the required automobiles.
c. You are to select the preferred alternative and show why it is the best choice.
Issues such as risk and control of assets should be apart of the discussion; Links the legal ramifications into discussion of risk and control; Specific, judicious use of GAAP included in discussion.
Explanation / Answer
Part A
When crumple car rent is planning its business and acquire 400 additional automobiles then it has 3 options
1. When creation is done by issuance of debt then debt are shown in balance sheet under head secured loans.
2. when creation is done by taking amount on lease then it is shown in balance sheet under head unsecured loans.
3. When we create a trust then is fixed assets.
Part B
The alternative is used i.e issue a debt.
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