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Below is the Operating Lease note from the financial statements of Rocky Mountai

ID: 2499952 • Letter: B

Question

Below is the Operating Lease note from the financial statements of Rocky Mountain Chocolate Factory, Inc. for the year ended February 28, 2015:

Operating Leases

The Company conducts its retail operations in facilities leased under non-cancelable operating leases.

The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:

2016

$

995,000

2017

753,000

2018

677,000

2019

617,000

2020

293,000

Thereafter

56,000

Total

$

3,391,000

Assume that RMC’s cost of capital is 2.5%.   Further, assume that RMC depreciates its facilities over 10 years using the straight-line method of depreciation with no salvage value.

1) How do you calculate the PVIF for 2016 and 2017?

2) If RMC capitalized its operating leases (that is, treated them as capital leases), by how much would net income differ as a result in 2016 and 2017? Clearly show, label and explain your computations.

2016

$

995,000

2017

753,000

2018

677,000

2019

617,000

2020

293,000

Thereafter

56,000

Total

$

3,391,000

Explanation / Answer

1.PVIF   for 2016 and 2017

Year    Amount         PV factor        PV inflow           

2016 $ 995,000               .9756                  970,722

2017 $ 753,000                .9518                 716,705

2. RMC capitalised operating lease. Difference in net income for 2016 and 2017

Capitalisation of lease will increase profit in

2016   by $ 995,000/-

2017 by $ 753,000/-

Operating lease capitalisation will reduce the expense to the extent of yearly operating lease payment

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