Leasing Computers at Persistent Learning Case Solution

Case Solution

Lately public Persistent Learning is acquiring vital computer assets. They need to work out how the lease or purchase decision will impact their financial claims, and the way industry will react given formerly forecast earnings and competitor's accounting.

Excel Calculations

Effect on Income Statement

Effect on Cash Flow

Lease analysis

Journal entries

Questions Covered

How would the company account for the “fair market value” and “one dollar purchase” leases for the computers, over the course of the next three years? Classify the leases as operating or capital lease, and for each year, show journal entries or T-accounts.

Directionally, what are the effects on the balance sheet, income statement, and statement of cash flow? 

The company is trying to decide between the “fair-market value” lease and the “one dollar purchase” lease. Which leasing alternative would you choose? Why?

Why do the competitors own their own computers?