You're feeling pretty good about Aigrette's financial statements and stop by Mr. Morton's office to let him know you're caught up.

"I'm glad you stopped by," Mr. Morton says. "I'm thinking about offering leases to our customers. I know we lease some of our equipment, so why shouldn't we provide that same option for the people who buy our cars? But I'm not sure how leases affect our financial statements. You'd better look into that for me, and let me know what you think."

You tell him you'll check into it, and you head back to your office. In the file cabinet Ms. Koffler used, you find a file labeled "Equipment Leases."

You remember that the last loan Aigrette took out was at an interest rate of 8%. You are sure the company could get that same rate again if they needed a loan. Aigrette uses straight-line depreciation for all equipment.

You make some notes as you look through the documents, and here's what you have when you are done:

Assembly EquipmentWelding EquipmentYearly rental (paid at beginning of year)$10,500$11,000Lease term12 years10 yearsEstimated economic life20 years10 yearsPurchase optionNo$5,000 at end of leaseRenewal optionNoNoFair market value at beginning of lease$100,000$75,000Cost of asset to lessor$100,000 Guaranteed residual valueNone$5,000Unguaranteed residual valueNoneNoneExecutory costsNoneNonePaid by Panache$1,000 per yearNonePaid by lessor (maintenance)None$1,000 per year (est.)Implicit rate of lessorNot known8%Estimated fair market value at end of lease$10,000$5,000Date lease was entered intoJanuary 1, 2011January 1, 2012

Based on your analysis of the information provided, create a memo for Mr. Morton in 3- to 4-page Microsoft Word document that includes the following:

  • An assessment of the assembly equipment and welding equipment leases that includes what type of lease each is.
  • Embed the journal entries, in a Microsoft Excel worksheet, that would have been made at the inception of each lease and the journal entries that will be made for 2011.
  • An evaluation of the types of leases that Aigrette could offer its customers and the effect of each type of lease on Aigrette's financial statements.
  • Recommend the type of lease for Aigrette, why you chose it, and the terms the leases would need to include to qualify as that type of lease.
  • Create the required journal entries in a Microsoft Excel worksheet and include a link to this in your document. Use the spreadsheet to present your analysis as well.
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