Balance Sheet Reporting Issues
Crumple Car Rentals is planning to expand into the western part of the United States and needs to acquire approximately 400 additional automobiles for rental purposes. Because Crumple’s cash reserves were substantially depleted in replacing the bumpers on existing automobiles with new “fashion plate” bumpers, the expansion funds must be acquired through other means. Crumple’s management has identified two options:
1. Issue additional debt.
2. Create a wholly owned leasing subsidiary that would borrow the money with a guarantee for payment from Crumple. The subsidiary would then lease the cars to the parent. The acquisition price of the cars is approximately the same under both alternatives.
Required
a. You have been asked to compare and contrast the two alternatives from the perspective of
(1) The impact on Crumple’s consolidated balance sheet.
(2) Their legal ramifications.
(3) The ability to control the maintenance, repair, and replacement of automobiles.
b. What other alternatives might be used in acquiring the required automobiles?
c. Select your preferred alternative and show why it is the better choice.