NLS Inc., leases an asset on 1 Jan 2015. The firm has no other assets or liabili
ID: 2787451 • Letter: N
Question
NLS Inc., leases an asset on 1 Jan 2015. The firm has no other assets or liabilities. The estimated economic life of the leased asset is five years with an expected salvage value of zero at the end of five ars. The asset will be depreciated straight-line over its economic life. The lease has a fixed noncancellable term of five years with lease payments of $6,275 paid at the end of each year. The implicit interest rate on the lease is 6.5% per year 1. How much interest expense will the firm pay in the first year of the lease? i. How much depreciation expense will the firm record in the first year of the lease? Suppose a similar second firm, OPERLS Inc., leased the same asset but treated it as an operatin lease instead (Assume they are allowed to do so). Which of the following statements is most likely true in the first year of the lease? A) FINLS will have higher cash from operating activities compared to OPERLS B) FINLS will have higher cash from financing activities compared to OPERLS C) FINLS will have higher net change in cash flow compared to OPERLS.Explanation / Answer
PV of lease Payments = Annual Payment*Sum of PV of 6.5% for 5 years = $6275*3.874 24,309.35 $ 1 Calculation of Interest Cost Lease Liability 01.01.2015 Value of asset 24,309 Lease Liability as on 31.12.2016 24,309 Interest Exp @ 6.5%% 1,580 $ 2 Depreciation = Vaue of asset/useful life = 24309/5 4,861.80 $ 3 a) FINLS WILL HAVE HIGHER CASH FROM OPERATING ACTIVITY AS COMPARED TO OPERLS
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