Unformatted text preview: manufacturer of water purifiers, is leasing an asset under a
10-year lease requiring annual end-of-year payments of $15,000. The lease can
be capitalized merely by calculating the present value of the lease payments over
the life of the lease. However, the rate at which the payments should be discounted is difficult to determine.9 If 10% were used, the present, or capitalized,
value of the lease would be $92,175 ($15,000 6.145). (The value calculated by
using a financial calculator is $92,169.) This value would be shown as an asset
and corresponding liability on the firm’s balance sheet, which should result in an
accurate reflection of the firm’s true financial position.
Because the consequences of missing a financial lease payment are the same as
those of missing an interest or principal payment on debt, a financial analyst must
view the lease as a long-term financial commitment of the lessee. With FASB No.
13, the inclusion of each financial (capital) lease as an asset and corresponding
liability (i.e., long-term debt...
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