operating lease to capital lease: you are analyzing the financial statements for

Question

operating lease to capital lease: you are analyzing the financial statements for blue tree Inc. in your analysis you notice the blue tree has a significant dollar amount of operating leases into future; you are concerned with off-balance sheet financing. From the lease footnote disclosure, you have obtained the following information regarding operating leases for the next ten years:

Year 1: $550

Year2: $565

Year3: $580

Year4: $610

Year5: $640

Totals for years 6-10 : $3200

You have also established that blue tree’s cost of capital is %8

Required: convert blue tree’s operating leases into a capital lease and demonstrate this would be shown on the balance sheet.

Explanation / Answer

Blue Tree Lease Payments PVIF@8$ Year 1 Present Value of lease Payments 1 550 0.92593 509 2 565 0.85734 484 3 580 0.79383 460 4 610 0.73503 448 5 640 0.68058 436 6 3200 0.63017 2017 7 3200 0.58349 1867 8 3200 0.54027 1729 9 3200 0.50025 1601 10 3200 0.46319 1482 Total amount by which capital lease should be recognised in the Balance sheet 11034

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