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LEASES_more_practice_on_leases

# LEASES_more_practice_on_leases - More Practice Problems on...

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More Practice Problems on Leases Solutions: Refer to UAL 1. Refer to Note 10 of UAL’s 1998 financial report. Record the journal entry to reflect scheduled payments during 1999 for operating and capital leases in place at the end of 1998. Use this information to infer an estimate of the average interest rate used by UAL to determine the present value of payments on capital leases at the end of 1998. 2. What would be the total amount of the obligation under capital leases included in the balance sheet at December 31, 1998 if UAL used an implicit interest rate of 8% to determine the present value of minimum lease payments on all capital leases? Assume that lease payments are made annually on December 31 and that payments after 2003 include annual payments of \$251 million. 3. UAL has significant commitments under operating leases. If these agreements had been treated as capital leases, what additional amount would be reported as a lease obligation on the balance sheet at December 21, 1998? What would be the impact on UAL’s debt-to-equity ratio computed in question 3 above? Why may this type of analysis be useful in evaluating companies? The following assumptions should be used to compute the present value of the minimum lease payments: a. The annual borrowing rate is 10%; b. Payments subsequent to 1998 (\$17,266 million) are comprised of annual payments of \$1,328 million; and c. Lease payments are made annually on December 31.

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2 Refer to Wal Mart Stores, Inc. (Wal Mart) 4. What is the total amount of rent expense that Wal Mart will show in fiscal 2000 (i.e., year ended January 31, 2000) relating to leases in place at January 31, 1999? 5. What is the total expense recorded by Wal Mart during fiscal 1999 relating to capital leases? You may assume that all property under capital leases relates to 20 year leases and that any new capital leases were entered into on the first day of the fiscal year. If the capital leases were instead treated as operating leases, what would be the amount of total expense recorded for the period? You may assume that all interest costs relating to lease obligations are paid as incurred. Why might Wal Mart prefer to structure certain leases as capital rather than operating and vice-versa? 6. What is the amount of the change in the obligation under capital leases during fiscal 1999 that is attributable to new capital leases were entered into during the year? 7. Wal Mart has significant commitments under operating leases. If these agreements had been treated as capital leases, what additional amount would be reported as a lease obligation on the balance sheet at January 31, 1999? The following assumptions should be used to compute the present value of the minimum lease payments: d. The annual borrowing rate is 9%; e. Payments subsequent to fiscal 1999 (\$2,642 million) are comprised of annual payments of \$294 million; and f. Lease payments are made annually on January 31.
3 UAL Corporation and Subsidiary Companies FORM 10-K (Excerpts) Statements of Consolidated Financial Position (In Millions) December 31 ----------- Assets 1998 1997 - ------ ---- ---- Current assets: Cash and cash equivalents \$ 390 \$ 295

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