4.5 Financing Lease Problem

You are given the following:

• LCM, Inc. is going to lease some equipment for 15 years at an annual charge of $200,000 – payable at the end of each year.
• There will be no salvage value
• LCM’s borrowing rate is 5%.
• The lease satisfies all the criteria of a Capital Lease.
• The “Before” balance sheet is noted below.

To do:

1. Fill-in LCM’s balance sheet and debt ratio at the lease’s inception.
2. Question: What would the balance sheet look like one year into the lease (i.e., “year later”)?

• • Assume straight-line depreciation for the asset.
  • Remember: the lease obligation is amortized at 5%.
  • Assume that the borrowing rate and lease rates are the same.
  • This is a two-part question.
    • One part has to do with calculating the depreciated asset value of the lease.
    • The other part has to do with the amortized lease obligation. They are not the same.
    • Therefore, an adjustment will need to be made to the balance sheet in order to make it balance.

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