Note 5. Lease Commitments The Company leases some of its facilities and equipmen
ID: 2800167 • Letter: N
Question
Note 5. Lease Commitments
The Company leases some of its facilities and equipment under various operating and capital leases. The lease agreements frequently include renewal and purchase provisions and require the Company to pay taxes, insurance, and maintenance costs.
Total rental expense under operating leases was $11,244,000, $9,986,000, and $8,854,000 in 2014, 2015, and 2016, respectively.
The following is a schedule of future minimum lease payments under capital leases and rental payments required under long-term operating leases at the end of the 2016 fiscal year (in $ thousands):
Fiscal years
Operating Leases
Capital leases
2017
$ 8,494
$121
2018
6,835
2019
4,952
2020
4,740
2021
5,020
Later years
17,850
Total
$47,891
$121
Less amount representing interest
(11)
Present value of minimum lease payments
$110
Assume that all lease payments are made at the end of the year.
(Required)
1. Estimate the interest rate implicit in the company’s capital lease obligation.
2. Use the interest rate in (1) to estimate the present value of the operating lease payments as of the end of the 2016 fiscal year. When doing so, assume that the payments due after 2021 are equal and will be made over a four-year period.
3.Indicate (higher, lower, or no change) & briefly explain the impact on the Company’s 2016 interest coverage, debt-to-equity ratios, ROA, CFO (operating cash flow), and CFF (financing cash flow), if the operating leases were instead accounted for as capital leases in 2016.
Fiscal years
Operating Leases
Capital leases
2017
$ 8,494
$121
2018
6,835
2019
4,952
2020
4,740
2021
5,020
Later years
17,850
Total
$47,891
$121
Less amount representing interest
(11)
Present value of minimum lease payments
$110
Explanation / Answer
1. Implicit Rate of Interest is Rs. 10% p.a.
((121-110)/110)^1/1
2. PV of Operational Lease is $ 33,326.15/-
Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total Lease 8494 6,835 4,952 4,740 5,020 5,020 5,020 5,020 5,020 Dis. Fac 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 PV 7,721.82 5,648.76 3,720.51 3,237.48 3,117.03 2,833.66 2,576.05 2,341.87 2,128.97 33,326.15Related Questions
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