As a loan officer for First Bank, you’re evaluating Newton Co.’s financial statements. Your evaluation reveals that Newton has no capital leases recorded on its financial statements while most other companies in its industry do have such leases. To effectively evaluate Newton’s financial position and compare it to industry standards, you’ve decided to constructively capitalize Newton’s operating leases. The following information is available from Newton’s financial statements for the year ended December 31, 2014:
Operating Lease Payments
Year . Minimum Operating Lease Payments
2015 ........... $ 500
2016 ............ 450
2017 ............. 410
2018 ............. 380
2019 ............ 350
After 2019 .......... 2,880
Total ............ $4,970
Required:
1. Assuming that Newton’s long-term debt rate is 8%, estimate its constructively capitalized operating lease liability.
2. How might you estimate the capitalized operating lease asset amount?
3. How will constructive capitalization affect Newton Co.’s debt-to-equity ratio?