Please answer the following question: California Enterprises Inc. reports the fo

Question

Please answer the following question:

California Enterprises Inc. reports the following in its 2016 annual report: ($ thousands) Operating Fiscal vear 2017 2018 2019 Net minimum lease payments Leases $922.8 840.6 431.3 $2,194.7 Required a. Calculate the present value of operating lease payments using a discount rate of 5% b. California Enterprises' balance sheet reports total assets of $24,109.2 thousand and total liabilities of $6,580.8 thousand. Calculate the company's total liabilities to equity ratio with and without the operating leases being capitalized c. Assume that the leased equipment has a useful life of 4 years and no salvage value. Estimate the effect on net operating profit before tax of capitalizing these operating leases. Assume rent expense in 2016 equals 2017 rent expense. Your answer must state the effect, explain its reason and calculate its amount. Estimate the effect on interest expense of capitalizing these operating leases. Your answer must state the effect, explain its reason and calculate its amount d.

Explanation / Answer

1. Present value of lease

2.

Company's equity = Total assets- Total liablities

24109.2-6580.8 = 17528.4

Liablities to equity ratio = Liablities/equities = 6580.8/17528.4 = 0.375

If operating lease capitlised then liablities will be = 6580.8+2013.76= 8594.56

then ratio will be = 8594.56/17528.4 = 0.490

3.

By capitlising the operating lease depreciation will be part of income statement as expense. Estimated net profit will be decreased. Amount of depreciation will be = 2013.76/4 = 503.44 per year.

4.Interest expnse will also part of income statement as expense. It will be also eligible for income tax benefits.

Year Lease Amount($ in thousands) P.V. Factor Discounted value 2017 922.8 0.9523 878.78 2018 840.6 0.9070 762.42 2019 431.3 0.8638 372.56 Total 2013.76

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