Presentvalueofleasepayments debtequityratio 5000

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Unformatted text preview: fferent methods for accounting for leases. If an analyst does not do this additional analysis there is a good chance that the analyst will be misled as to the relative performance of the companies. The more leases that the companies have on their books, the more this difference between operating leases and capital leases could affect the analysis of the companies. A review of “off­balance sheet financing” is always a prudent step in financial analysis. P11–14 a. The initial balance sheet value of the equipment and the initial leasehold obligation both equal the present value of the lease payments. This amount can be determined in the following ways. Present value of lease payments = FMV of equipment = $119,782 or Present value of lease payments P11–14 Concluded = Present value of lease payments = $30,000 Present value of an ordinary annuity factor for i = 8% and n = 5 = $30,000 3.99271 (from Table 5 in Appendix A) = $119,781.30 Date 1/1/11 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 Total Balance Sheet Value of Equipmenta $119,781.30 95,825.04 71,868.78 47,912.52 23,956.26 (0.00) Leasehold Obligationb $119,781.30 99,363.80 77,312.91 53,497.94 27,777.78 (0.00) Interest Expensec $9,582.50 7,949.10 6,185.03 4,279.84 2,222.22 $30,218.70 Depr. Expensed Total Expense $23,956.26 23,956.26 23,956.26 23,956.26 23,956.26 $119,781.30 $33,538.76 31,905.36 30,141.29 28,236.10 26,178.48 $150,000.00e a Balance Sheet Value of Equipment = Value of Equipment on 1/1/11 – Accum. deprec. b Leasehold Obligation = Leasehold Obligation at Beginning of the Period – ($30,000 Lease Payment – Interest Expense for the Period) c Interest Expense = Leasehold Obligation at Beginning of the Period 8% d Depreciation Expense = $119,781.30 ÷ 5 years e Total has penny discrepancy due to rounding to even cents throughout lease term. b. Total Rent Expense = Annual Rent Payments Number of Years of the Lease = $30,000 5 years = $150,000 c. If the lease is treated as a capital lease, total expenses would be $150,000 [from part (a)]. If the lease is treated as an operating lease, total expenses would still be $150,000 [from part (b)]. Although total expenses would be the same under either approach, different expense a...
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