Milton Co. is expanding its operations and is in the process of selecting a meth
ID: 2376751 • Letter: M
Question
Milton Co. is expanding its operations and is in the process of selecting a method of financing this program. After some investigation, the company determines that it (1) may issue bonds and with the proceeds purchase the needed assets or (2) lease the assets on a long term basis. Without knowing the comparative costs involved, answer the following question:What will be the differences in the balance sheet and income statement if the assets are purchased with the proceeds of a bond issue versus leased?
Explanation / Answer
If you buy the assets with the proceeds from the bonds, you would have the assets on your balance sheet (which will depreciate over time) and then you will have a bond payable under liabilities on the balance sheet. On the income statement, when you pay off the bond you will have interest to expense. If you lease the assets, then you should have a liability on the books that is for the current liability portion (the portion for the current year) and a long term liability for the remainder.On the income statement you would record this as Rent Expense.