Data

Included on the following pages are excerpts from the Company's fiscal 2012 annual report including:

ITEM 2: Properties

Consolidated Balance Sheet

Consolidated Statement of Income

Note 2: Long-term debt, Short-term borrowings and Capital leases obligations

Note 3: Operating leases

Note 11: Commitments

Requirements

What was the total amount of rent expense reported for all operating leases in 2014? Of this total rent expense, how much appears related to aircraft rentals?

Identify the number and types of aircraft at December 31, 2014 under:

Number of aircraft under capital lease:

Number of aircraft under operating lease:

Miscellaneous:

What is the net amount of flight equipment under capital leases included on the balance sheet (asset) category Flight equipment as of December 31, 2014?

What is the amount of capitalized lease (liabilities) included on the balance sheet at December 31, 2014?

Why are these two amounts different?

Assume JetBlue were to capitalize non-cancelable aircraft operating leases at December 31, 2014:

What would be the approximate dollar effect on the rest of the accounting identity (i.e., Assets and Owners Equity)? You may assume the following information to simplify your calculation (round your answer to nearest million):

Annual payments of $55.1 million per year for the next 12 years from the end of 2015 to the end of 2026. (This is a simplification, but a reasonable one given $55.1 million x 12 years = $661 million which is the total of minimum lease payments reported in Note 3). You may assume this is an ordinary annuity.

Assume the company has no commitments beyond 2026.

Assume the prevailing interest rate for leases is 4%.

Assume all the leases are new. (Therefore the capitalized lease obligation = capitalized lease asset).

Compute JetBlues debt to equity ratio for 2014 based on reported financial statement and assuming all the operating leases were capitalized (as in a. above).

As reported:

With restated operating leases capitalized:

What type(s) of users of financial statements would be interested in JetBluess accounting treatment of non-cancelable operating leases?

Item 2: Properties and Note 11: Commitments (shown below) identify JetBlues firm commitment to purchase 12 new Airbus A321s for $610 million. Assume these jets will replace older jets currently under operating leases with a total annual lease payment of $35,700,000. Also assume that JetBlue may arrange any type of financing to acquire the aircraft; furthermore, they have obtained a quote from the lessor with the following terms:

Summary of proposed lease terms

Date of lease January 1, 2015

Non-cancelable lease term: 15 years

Negotiated purchase price of the 12 aircraft: $610 million

Annual Payments of $47,600,000 paid at the beginning of the year

Purchase Option: JetBlue has the option to acquire the 12 aircraft at the end of the lease at fair market value, which is expected to be $40 million (total). JetBlue must notify lessor 1 year before expiration of the lease that it intends to exercise its option. Lessor anticipates the aircraft will have an additional 15 years of useful life remaining at the end of the lease with JetBlue.

Insurance, Maintenance, Taxes: JetBlue will pay all insurance, taxes and maintenance needed to operate the planes as passenger aircraft in compliance with FAA standards.

JetBlues incremental borrowing rate: 4%

If JetBlue agrees to this lease, will it be accounted for as an Operating or Capital lease? Explain fully showing all computations. Address all 4 points regarding the criteria for lease capitalization.

Assume JetBlue makes a counter offer where the only change to lease terms for the aircraft was that the lease would run for 20 years with an end of the year payment of $35,700,000. Would the lease proposed in the counter offer be a capital or operating lease? Explain fully showing all computations. Address all 4 points regarding the criteria for lease capitalization.

Complete the following table (an Excel Template has been provided on ICON). Assume JetBlue depreciates the assets under a capitalized lease over the lesser of the assets economic life or lease term using the straight-line method.

Assuming an effective income tax rate of 35.6% calculate JetBlues 2014 Return on Assets, Debt to Equity, and Interest coverage. Now assume that JetBlues income in 2015, after the lease of the 12 new jets is completed, is the same as 2014 in all other respects except the lease. In addition, to make the calculations simple, assume that the new lease payment of $47,600,000 are exactly offset by the combined rent expense savings on old jets, returned at lease expiration, reduced jet fuel cost, given the increased fuel efficiency of the new aircraft (in other words there are no additional savings or expenses).

Use the results from your table in part 6c to calculate, for each of the two lease alternatives, JetBlues Pro Forma Net Income, Return on Assets, Debt to Equity, and Interest coverage ratio in 2014. When computing the ratios under the capital lease alternative

Does the choice between a 15 and 20-year lease have a significant impact on the companys financial results as summarized by these ratios? If so, is this different accounting treatment justified. (Explain)

Other Commitments Continued