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Accounting for a Financing Lease:
Tauntron Manufacturing Inc is a machine shop in Taunton, Massachusetts. The firm recently leased drill press for 20 year term at payments of $9000 per year payable at year end. No residual value was assumed in the lease which is clearly a financing lease. Taunton can borrow at 8% and will depreciate the press straight line over 20 years.
Shortly before the lease became effective, Taunton's balance sheet was as followed:
Taunton Manufacturing Inc. Balance Sheet ($000)
Current Assets
$35
Current Liabilities
$15
Fixed Assets
$315
Long-term debt
$65
Total Assets
$350
Equity
$70
Total liabilities &equity
$150
Answer the following questions working in whole dollars but present balance sheet accounts rounded to the nearest $1000.
a. Construct Taunton's balance sheet showing the capitalized lease and the related lease obligation.
b. Calculate the firm's debt ratio before and after the lease, and comment on the difference
c. Reconstruct the balance sheet at the end of the first year assuming the other accounts remain the same.
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