On January 1, 2009, Grant Company leased telephone equipment from Xu, Inc. Grant uses straight-line depreciation. The contract requires Grant to pay $5,000 each December 31 for the next three years, at which time the equipment is to be returned to Xu. Using an interest rate of 8%, the present value of the lease payments is $12,885. The following is Grant's January 1, 2009, balance sheet before the lease agreement.
Calculate and compare Grant's debt/equity ratios on January 1, 2009, immediately after the lease is signed, as an operating lease and a capital lease.

Question

On January 1, 2009, Grant Company leased telephone equipment from Xu, Inc. Grant uses straight-line depreciation. The contract requires Grant to pay $5,000 each December 31 for the next three years, at which time the equipment is to be returned to Xu. Using an interest rate of 8%, the present value of the lease payments is $12,885. The following is Grant's January 1, 2009, balance sheet before the lease agreement.
  Calculate and compare Grant's debt/equity ratios on January 1, 2009, immediately after the lease is signed, as an operating lease and a capital lease.

Quizplus · Accepted Answer

The Answer of On January 1, 2009, Grant Company leased telephone equipment from Xu, Inc. Grant uses straight-line depreciation. The contract requires Grant to pay $5,000 each December 31 for the next three years, at which time the equipment is to be returned to Xu. Using an interest rate of 8%, the present value of the lease payments is $12,885. The following is Grant's January 1, 2009, balance sheet before the lease agreement.
  Calculate and compare Grant's debt/equity ratios on January 1, 2009, immediately after the lease is signed, as an operating lease and a capital lease.

On January 1, 2009, Grant Company Leased Telephone Equipment from Xu