8 % interest straight line depreciation (amortiza no residual (salvage) value ca

Question

8 % interest straight line depreciation (amortiza no residual (salvage) value capitalize operating lease tion) Required footnote disclosure: Fiscal year Capital Lease $410 $415 Operating Lease $500 2005 2006 2007 500 $500 $300 $300 $600 2008 2009 thereafter In class and in our text we discussed and studied an approach to capitalize operating leases. Using that method please answer the following questions: 9. What is the estimated number of remaining years left on the lease? 10. Using the above information to capitalize operating leases, what is the estimated additional liability on 1/1/2005

Explanation / Answer

Answer:

1. No. of years left after 2009 is as under:

Lease left after 2009 = $600

Lease payment in 2009 = $ 300.

Lease Left Thereafter = 600/300 = 2 years.

2. Total lease payment shall last till 2011.

Calculating PV at 8% rate of return we shall get following table:

PV@8% = $2,077.

Year Capital Lease Operating Lease Present Value of Operating Lease @8% 2005 $410 $500 $463 2006 $415 $500 $429 2007 $500 $397 2008 $300 $221 2009 $300 $204 2010 $300 $189 2011 $300 $175

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