Q1

Consider a non-cancellable lease beginning December 31, 2010 with annual MLPs (minimum lease payments) of $12,000 made at the end of each year for 5 years. Assume 10% discount rate.

Required:

1. Construct the underlying amortization table. ( 6 marks)
2. Calculate the income effects of lease classification for each year. (10 marks)

That is, complete the following table:

Operating Lease Capital Lease

Year Rent (Total expense) Depreciation Interest Total expense

2011

2012

2013

2014

2015

1. Calculate the B/S effects of lease classification for December 31, 2013. (6 marks)

That is, complete the following table:

2013

Assets

Leased asset

Acc. Depreciation

Leased asset, net

Liabilities

Current portion of lease obligation

Long-term debt: lease obligation

1. Calculate the cash flow effects of lease classification for each year. (8 marks)

That is, complete the following table:

Operating Lease Capital Lease

Year CFO CFO CFF

2011

2012

2013

2014

2015

Q2

1. Construct the underlying amortization table for a debt instrument that pays $30,000 at the end of the year for 4 years. Assume a discount rate of 10%.

1. CAP Inc enters into a lease agreement on Jan. 1, 2010 to acquire the use of a piece of equipment for 5 years beginning on Jan. 1, 2010. The lease requires 5 annual payments of $30,000 staring on Jan. 1, 2010. The useful life of the equipment is 5 years, and its salvage value is zero. CAP accounts for the lease as a finance/capital lease. Assume a discount rate of 10%.

Required:

1. What is the amount reported as a leased asset on the B/S on Jan 1, 2010? What is the depreciation expense for the fiscal year 2010? What is the amount reported as a leased asset on B/S on Dec. 31, 2013? (8 marks)
2. What is the amount of the lease liability reported on B/S on Jan 1, 2012? What is the interest expense reported in fiscal year 2012? (6 marks)
3. If CAP had determined that the above lease was an operating lease, what amount of expense would be reported on the income statement in fiscal 2011? How does this expense compare to the expenses reported under a capital lease? (6 marks)