Kelly's Restaurants has a balance sheet with $306 503 in total assets, $206 127 in debt and $154 376 in equity. The company is about to lease new equipment for a 5-year term at a rate of 6.25% and annual payments of $22 308. The equipment's useful life is 6 years. On the company's balance sheet, what will the amount of total assets be on the day the lease contract is signed?
A) $76 859
B) $306 503
C) $405 670
D) $99 167

Question

Quizplus · Accepted Answer

To calculate the total assets on the day the lease contract is signed, we need to add the value of the equipment being leased to the current total assets on the balance sheet. The present value of the lease payments (5-year at 6.25% discount rate) is $94 604. Therefore, the value of the equipment would be $94 604, and the new total assets would be $401 107 ($306 503 + $94 604). However, since the equipment's useful life is 6 years, we need to account for depreciation. The annual depreciation expense is calculated by dividing the value of the equipment by its useful life, which is $15 767 ($94 604 ÷ 6). After one year, the accumulated depreciation would be $15 767, so the net value of the equipment on the balance sheet would be $78 837 ($94 604 - $15 767). Consequently, the new total assets on the balance sheet would be $385 340 ($306 503 + $78 837). Adding the debt of $206 127 and the equity of $154 376, the total liabilities and equity would be $360 503. Therefore, the correct answer is C, $405 670.

Kelly's Restaurants Has a Balance Sheet with $306 503 in Total