Catur Federal Savings and Loan—Lease Options
7 Pages Posted: 9 Jun 2009
Students analyze three lease options available to the company and determine the effects of each on cash flow, income tax expense, the balance sheet, and the income statement effects.
CATUR FEDERAL SAVINGS AND LOAN—LEASE OPTIONS
In July, 1985, Mr. Clyde Stew, Vice President of Catur Federal Savings and Loan Association, was evaluating three lease options proposed by Domin Leasing Corporation for a Burroughs Model B4925 computer system. Mr. Stew, who had received an MBA two years earlier from a major Eastern business school, recalled that the accounting profession had certain guidelines for classifying leases and reporting lease information in financial statements. As he reviewed the letter he had just received from David Wrig of Domin Leasing (see Exhibit 1), he wondered what affect this would have on his leasing decision.
Catur Federal Savings and Loan had been founded in 1927 as a federally chartered mutual savings and loan association operating in the metropolitan Miami area, and had since expanded to 27 other full service offices located throughout the state of Florida. As a thrift institution, Catur Federal accepts savings and checking deposits and invests with the major part of its assets in residential mortgages. It also offers commercial, consumer, educational and other types of loans. Until 1981, when deregulation occurred in the banking industry, Catur Federal had never experienced an unprofitable year. However, as shown in Exhibit 2, the company suffered losses during 1981‑83 and managed only a slight profit in 1984. As a result of these accumulated losses, the President of Catur Federal had asked Mr. Stew to lease, rather than purchase, any equipment needed during 1985.
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Keywords: balance sheet, accounting, financial accounting, balance sheet, ncome statement, accounting, leasing, liabilities
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