103. Dake Limited has just leased two new pieces of manufacturing equipment. Machine #1 had a purchase price of $26,000; the annual lease payment is $6,500 at the end of each of the next five years....

103. Dake Limited has just leased two new pieces of manufacturing equipment. Machine #1 had a purchase price of $26,000; the annual lease payment is $6,500 at the end of each of the next five years. The machine is expected to have a useful life of six years. The machine will be returned to the manufacturer at the end of the 5-year lease. Machine #2 can be purchased for $18,000. The lease requires annual payments of $3,000 at the end of the next three years. Dake has the option of purchasing the lease at the end of the lease term for its fair market value at that time. Machine # 2 is expected to have a useful life of 10 years. Dake's incremental borrowing rate is 8%.



Required:


A) Determine the type of lease for each machine.
B) Prepare the journal entries for the first year of each lease.

104. Banff Corporation is a new graphic design business. It requires computers to do the graphic design work and is trying to decide how to acquire them. One option is to buy the computers from a store and borrow the money they need from the bank. A second option is to lease the computers from another company that specializes in the leasing of office equipment. The leasing company is offering a two-year lease that they could renew or change when it expired. The computers they are interested in have a physical life of five years, but Banff wants to make sure that it always has current equipment to remain competitive. The two owners have approached you to help them decided. They want to consider the impact on their financial statements as well as the technical requirements of the computers when they decide.



Required:


A) Evaluate, from Banff's perspective, the two options that are available.
B) Which would you recommend? Why?