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Advantages and Disadvantages of Leasing Worksheet

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Accounting

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Case Study

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PART C: Leases
SP is considering to lease assets from three potential lessors. The assets are to be used in
property development in next year. The Operation Manager provides the details as follows:
Potential lessor
Harman Bhd.
Armaq Bhd.
Mandel Bhd.
Type of asset
Excavator
Dump Truck
Concrete Mixer
Yearly rental
RM15,000 (first
payment on 31
December 2018)
RM6,000 (first
payment on 28
February 2019)
RM5,500 (first
payment on 30 June
2019)
Inception date
1 January 2018
1 March 2018
1 July 2018
Lease term
10 years
7 years
3 years
Estimated economic
life
25 years
15 years
7 years
Purchase option
RM75,000 at end of
10 years
None
None
Renewal option
None
None
None
Fair value at
inception of lease
RM220,000
RM70,000
RM20,000
Guaranteed residual
value
-0-
RM15,000
RM10,000
Estimated residual
value at end of lease
term
RM90,000
RM11,000
RM10,000
Implicit rate
5%
4%
4%
CASE INSTRUCTIONS:
(8) Assuming that SP agreed to lease all the assets, prepare journal entries at the inception
date.
Date
Accounts
Debit (RM)
Credit (RM)
Harman Bhd
Leased Assets
115825.95
Leased Liability
115825.95
Mandel Bhd
Leased Assets
24,153
Leased Liability
24,153

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(9) For each of the assets, provide an analysis to determine the type of lease for lessor
using the following schedule.
HARMAN BHD
ARMAQ BHD
MANDEL BHD
No
No
No
Yes
No
No
10 years/ 25 years
= 40%
No
7 years/ 15 years
= 47%
No
3 years/ 7 years
= 43%
No
No
=RM115825.95/220000
= 53%
No
=RM 47411.1/70000
= 68%
Yes
=RM24153/20000
= 120%
Finance lease
Operating lease
Finance lease
(10) Mr. Kiran proposes to issue bonds and with the cash proceeds purchase the needed
assets. What might be the advantages of leasing the assets instead of owning them?
What might be the disadvantages of leasing the assets instead of owning them?
The advantages of Leasing
The disadvantages of leasing
It is good for assets that needs to be
updated often because updated technology
can be acquired easier and quicker. If the
assets need to updated on an annual basis to
remain competitive, leasing helps to avoid
being stuck with outdated assets.
Maintenance is up to leasing company’s
specification, so it may be difficult to get
things fixed.
No need to pay for maintenance fee.
Usually pay higher costs over time
There is less expense up-front with leasing
because of easy and preditcable payment.
The available length of lease terms may be
longer than needed.

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PART C: Leases SP is considering to lease assets from three potential lessors. The assets are to be used in property development in next year. The Operation Manager provides the details as follows: Potential lessor Harman Bhd. Armaq Bhd. Mandel Bhd. Type of asset Yearly rental Excavator RM15,000 (first payment on 31 December 2018) 1 January 2018 10 years 25 years Dump Truck RM6,000 (first payment on 28 February 2019) 1 March 2018 7 years 15 years Concrete Mixer RM5,500 (first payment on 30 June 2019) 1 July 2018 3 years 7 years RM75,000 at end of 10 years None RM220,000 None None None RM70,000 None RM20,000 -0- RM15,000 RM10,000 RM90,000 RM11,000 RM10,000 5% 4% 4% Inception date Lease term Estimated economic life Purchase option Renewal option Fair value at inception of lease Guaranteed residual value Estimated residual value at end of lease term Implicit rate CASE INSTRUCTIONS: (8) Date Assuming that SP agreed to lease all the assets, prepare journal entries at the inception date. Accounts Harman Bhd Leased Assets Leased Liability Mandel Bhd Leased Assets Leased Liability Debit (RM) Credit (RM) 115825.95 115825.95 24,153 24,153 (9) For each of the a ...
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