Question: A. Long-Term Asset Acquisition Roxy and Harley (R & H) is considering a significant equipment replacement. R & H would like to replace some of their equipment before December 31, 2017. The equipment originally cost $840,000 and the equipment's accumulated depreciation balance at the end of 2016 is will be $790,000. At this point the equipment is depreciated to its salvage value. Your long-term asset accountant, Joe, tells you about four equipment options as follows:
The estimated life of any new equipment is 7 years. R & H would like you to analyze the four options to determine the financial impact of each decision and any non-financial considerations that may result from each decision. Additional information about each option is presented below:
Option 3: Purchase the new equipment by giving a non-interest-bearing note with five payments of $199,000 to the supplier (starting on the first day of note's term and each year thereafter) and selling the old equipment for $60,000 cash. The first $199,000 payment would be made in late December 2016. The prevailing interest rate for obligations of this nature is 10%.
Prepare journal entries in general journal form for each of the four options.
Write a brief memo on how each option affects the financial statements. Include your journal entry(ies) in the body of your memo for each option. Discuss the strengths and weaknesses of each option.