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The Strill Oil Company is trying to decide whether to lease or buy a new...

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Accounting

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The Strill Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide RM1,200,000 in annual pretax cost savings. The system costs RM6,700,000 and will be depreciated straight-line to zero over 4 years. Strill's tax rate is 35 percent, and the firm can borrow at 11 percent. Nexgain Leasing Company has offered to lease the drilling equipment to Strill for payments of RM1,750,000 per year. Required: a) Determine the net advantage to leasing (NAL) and should the Still Oil Company lease or buy the drilling system? (6 marks) (CLO3:PLO2:04) b) Leasing is a way businesses finance plan, property and equipment. Any asset can be purchased or leased. Explain the TWO (2) differences between purchasing an asset and leasing an asset. If the company decided to lease the asset, discuss the accounting criteria for determining whether or not a lease must be reported on the balance sheet. (8 marks) (CLO3:PLO2:04)

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