Yang Motorbikes entered into a non-cancellable five-year lease agreement on 1 April 2010 The lease was for a piece of complicated equipment with a related service component which is expected to
Yang Motorbikes entered into a non-cancellable, five-year lease agreement on 1 April 2010. The lease was for a piece of complicated equipment with a related service component, which is expected to have an economic life of twelve years, after which time it will have an expected residual value of $210,000. Ownership is not transferred. There are to be five annual payments of $350,000, the first to be made on 31 March 2011 (i.e. lease payments are payable at the end of the year). Included in the $350,000 is $35,000 representing payment for administrative processing. Straight line depreciation is used. The interest rate is 5%. (Assume 31 March year-end). Blank Motor Context: A rival competitor, Blake Motorbikes, also leases the complicated piece of equipment but does not capitalise the lease (i.e. it simply records rent expense). Blake Motorbikes makes a return on assets of 8%. Currently Yang Motorbikes has assets of $10 million and an EBIT of $800,000, which also results in a ROA of 8%. Yang thinks her company is more efficient than Blake Motorbikes. Explain to her whether this is true or not by recalculating the ROA of Yang Motorbikes as it would be if the same accounting methods as Blake Motorbikes were used Question Yang is worried that the bank may only read the financial statements and value Yang Motorbikes no differently than Blake Motorbikes. Should she be? Explain why or why not.