Following lease footnote disclosure is provided by the Company: Note 5. Lease Co
ID: 2592330 • Letter: F
Question
Following lease footnote disclosure is provided by the Company:
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):
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 payment $110Explanation / Answer
1) The implicit interest rate in the capital lease obligation :-
Present value of minimum lease payments = PVF(1 year,r%)*lease rental
$110 = 1/(1+r/100)*$121
(1+r/100) = $121/$110
r/100 = 1.1-1 = 0.10 = 10/100
r = 10%
Implicit rate of interest in the company's capital lease obligation = 10%
2) Present value of Operating lease payments at the end of 2016 (Amount in $)
3) If the operating leases were accounted for as capital leases in 2016, then
Years Operating lease rentals (a) PVF@10% (b) Present value of lease rentals (a*b) 2017 8,494 0.909 7,721 2018 6,835 0.826 5,646 2019 4,952 0.751 3,719 2020 4,740 0.683 3,237 2021 5,020 0.621 3,117 2022 (17,850/4) = 4,463 0.564 2,517 2023 4,462 0.513 2,289 2024 4,463 0.466 2,080 2025 4,462 0.424 1,892 Total Present value 32,218