(A) On December 28, 2008, Schematics Co. disclosed the following information about its operating lease commitments (Emillions) 2007 2008 Within one year +,56 454 Between one and five years 1,539 1,557 After five years 2,933 2,845 Total 4,928 4,856 I Schematics's operating lease expense in 2008 amounted to 551 million. Assume that Schematics records its finance lease habilities at an interest rate of 8 percent. Use this rate to capitalize Schematics's operating leases at December 31, 2007 and 2008. (Note that the assumed average economic life of the operating leases is 13 years) Schematics's operating lease expense in 2008 amounted to 551 million. Assume that Schematics records its finance lease liabilities at an interest rate of 8 percent. Use this rate to capitalize Schematics's operating leases at December 31, 2007 and 2008. (Note that the assumed average economic life of the operating leases is 13 years) Required: I iii. Record the adjustment to Schematics's balance sheet at the end of 2007 to reflect the capitalization of operating leases (5 Marks) iv. How would this reporting change affect Schematics's income statement in 2008? (5 Marks) (B) When bringing operating lease commitments to the balance sheet, some analysts assume that in each year of the lease term depreciation on the operating lease assets is exactly equal to the difference between a) the operating lease payment and, b) the estimated interest expense on the operating lease obligation Required: i. Explain how this simplifies the adjustments. (5 Marks) Do you agree that this is a valid assumption? (5 Marks) ii. (A) On December 28, 2008, Schematics Co. disclosed the following information about its operating lease commitments (Emillions) 2007 2008 Within one year +,56 454 Between one and five years 1,539 1,557 After five years 2,933 2,845 Total 4,928 4,856 I Schematics's operating lease expense in 2008 amounted to 551 million. Assume that Schematics records its finance lease habilities at an interest rate of 8 percent. Use this rate to capitalize Schematics's operating leases at December 31, 2007 and 2008. (Note that the assumed average economic life of the operating leases is 13 years) Schematics's operating lease expense in 2008 amounted to 551 million. Assume that Schematics records its finance lease liabilities at an interest rate of 8 percent. Use this rate to capitalize Schematics's operating leases at December 31, 2007 and 2008. (Note that the assumed average economic life of the operating leases is 13 years) Required: I iii. Record the adjustment to Schematics's balance sheet at the end of 2007 to reflect the capitalization of operating leases (5 Marks) iv. How would this reporting change affect Schematics's income statement in 2008? (5 Marks) (B) When bringing operating lease commitments to the balance sheet, some analysts assume that in each year of the lease term depreciation on the operating lease assets is exactly equal to the difference between a) the operating lease payment and, b) the estimated interest expense on the operating lease obligation Required: i. Explain how this simplifies the adjustments. (5 Marks) Do you agree that this is a valid assumption
