Reference no: EM132067425
Questions 15-17 (Operating and Capital Lease Adjustments)
Use the following information for questions 15-17 ABC Company is a startup company in an industry that exclusively uses capital leases for its expensive medical testing equipment.
ABC, however, used operating lease accounting in its first year of operations. Assume the average lifespan of ABC's leased equipment is 20 years and that their current cost of debt is 7.45%. Last year, the cost of debt was 6.50%. The annual lease payments are $600,000.
ABC's industry uses straight-line depreciation and the effective tax rate is 30%. The financial year 2016 just ended and all leases were renegotiated on the final day of the year. Payments are also made on the last day of the year.
15. Assume that you have the task of restating the financial statements to reflect the leases as being capitalized (as opposed to operating lease treatment). How much is the capitalized operating lease liability that you would present on the re-stated balance sheet?
a. $12,000,000 b. $6,140,023 c. $5,997,455 d. $6,440,826 e. $6,611,104
16. Now, assume the present value of the lease payments over the entire life of the contract was $6,000,000. Adjust ABC's books to reflect the lease as being capitalized. The depreciation expense that should be charged against income in the 8th year is:
a. $457,430 b. $600,000 c. $364,238 d. $307,000 e. $300,000
17. Adjust ABC's books to reflect the lease as being capitalized. Maintain the $6,000,000 assumption. Compute the appropriate charge for interest expense in the 2017 Income Statement that is associated with capitalizing the leases.
a. $457,432 b. $447,000 c. $390,000 d. $399,102 e. $894,000
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