I need a reply to the following discussion posts. Needs to have an in-text citation and should be approximately 2-3 paragraphs for each one with an open-ended question to my fellow students. This does not need a title page, and one reference is sufficient. Please make sure there is an open-ended question at the end. (Article attached)
Question: To prepare for this discussion, please go the case that you read for this week, “Leasing Decision at Magnet Beauty Products, Inc.,” and calculate the impact of the two lease options on Magnet’s income statement, balance sheet, and cash flow.
Which lease option should Janette Clark choose? Why?
Do you agree with the proposed new lease accounting rules? Why/why not?
I need a reply to this post:
Reply to Karen!
The lease option that I think Janette Clark should choose is the 3 plus 2-year lease for the following reasons:
1. It will decrease her total operating expense; however, it will increase her EBITDA (the difference is going to have to show up somewhere)
2. It will increase her net income before taxes and
3. It will increase her net income,
4. She will have the security of not having to move any of the stores, which is important for her because she has built up a base of clients and will want to remain in a stable location,
5. She will have the security of not having increased rent what will happen with her 1-year leases, the 3 plus 2-year lease will remain at a constant level.
I do agree with the proposed new lease accounting rules. This money is still going to have to be paid out with the change in laws, no matter if it is for rent or a lease. Now it is just a matter of accounting for that expense. The income statements may show more expense in the first couple of years but it levels off in the last couple of years. The only way to get around spending money on rent or a lease is to purchase the property, then she would be able to add that as an asset/investment. This might not be the wisest choice if she is thinking of selling her business towards the end of her lease option because then she would have a building that she would no longer have a use for, unless she opened another business or rented out the building to another company.
I am still a little confused on how to record operating expense vs. capital investment when it comes to leases, so I look forward to learning from my classmates!