Balance Sheet Reporting Issues
Crumple Car Rentals is planning to expand into the western part of the United States and needs to acquire approximately 400 additional automobiles for rental purposes. Because Crumple’s cash reserves were substantially depleted in replacing the bumpers on existing automobiles with new “fashion plate” bumpers, the expansion funds must be acquired through other means. Crumple’s management has identified three options:
Issue additional debt.
Create a wholly owned leasing subsidiary that would borrow the money with a guarantee for payment from Crumple. The subsidiary would then lease the cars to the parent.
Create a trust that would borrow the money with a guarantee for repayment from Crumple and lease the cars to it. In the event of liquidation, the residual value of the trust would go to the Historical Preservation Society of Pleasantville.
The acquisition price of the cars is approximately the same under all three alternatives.
Required
You have been asked to compare and contrast the three alternatives from the perspective of:
The impact on Crumple’s consolidated balance sheet.
Their legal ramifications.
a. The ability to control the maintenance, repair and replacement of automobiles.
b. You are to consider any alternatives that might be used in acquiring the required automobiles.
c. You are to select the preferred alternatives and show why the best choice is.