12–61
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Financial Reporting and Analysis (5th Ed.)
Chapter 12 Solutions
Financial Reporting for Leases
Cases
Cases
C12-1. AMR Corporation: Constructively capitalizing operating leases (LO 2, 5,
10, 11)
(all $ amounts in millions)
All answers are in millions.
Requirement 1:
Requirement 4: Total debt to total assets
From the balance sheet
Debt
=
$28,927
=
1.137
From the balance sheet
Assets
$25,438
Requirement 5: Entry to record capital lease in 2010
DR Current obligation under capital leases
$90
Balance
sheet
DR Interest expense
91
Plug
CR Cash
$181
Note 5
$91
12–63
To obtain the present value of the lease payments, the timing for the
thereafter amount must be estimated as follows:
2014 payment
$614
Less average decrease for
most recent two years ([$848-
$614]/2)
117
Expected rental during
thereafter
$497
Estimated life for thereafter
Thereafter
$5,021
Divided by expected rental
$ 497
Expected years
10.10
Say
10 years
Estimate of thereafter annuity
Thereafter amount
$5,021
Divided by estimated life for
thereafter
10
$ 502.1
Present value calculations
Strictly PV factors
Discount
Rate 13.0%
Year
# of Years
discounted
Operating
Lease
Payment
PV factor
@13.0%
PV of
Operating
Lease
2010 1 $1,057.00 0.88496 $935
2011 2 1,032.00 0.78315 808
2012 3 848.00 0.69305 588
2013 4 755.00 0.61332 463
2014 5 614.00 0.54276 333
2015 6 502.10 0.48032 241
2016 7 502.10 0.42506 213
2017 8 502.10 0.37616 189
2018 9 502.10 0.33288 167
12–65
PV factors with PVOA factors
Discount
Rate 13.0%
Year
# of Years
discounted
Operating
Lease
Payment
PV factor
@13.0%
PV of
Operating
Lease
2010 1 1,057$ 0.88496 $935
2011 2 1,032 0.78315 808
2012 3848 0.69305 588
2013 4755 0.61332 463 6.46238
2014 5614 0.54276 333 (3.51723)
Thereafter 10 502.10 2.94515 1,479 2.94515
Total present value $4,606
The thereafter factor of 2.94515 equals an ordinary annuity for 15 years less
an ordinary annuity for five years at 13%, or 6.46238 less 3.51723.
Requirement 8: Entry to constructively capitalize the operating leases
DR Lease obligation
$1,200
CR Retained earnings
$1,200
DR Net property under capital leases
$1,972
DR Retained earnings
2,634
CR Obligations under capital leases
$4,606
12–66
295
689
Net assets under capital leases from requirement 2
Obligations under capital leases from requirement 1
=
43%
=
Requirement 9: Change in debt to total assets ratio
Prior Debt
$28,927
Operating lease liability
(1,200)
New lease debt
4,606
$32,333 (a)
Prior Assets
$25,438
New Lease Asset (43%)
1,972
$27,410 (b)
Revised ratio (a/b)
1.180
Percentage change (1.180/1.137-1)
3.7%
12–67
C12-2. IFRS and FASB/IASB Exposure Draft (LO 10, 11)
Requirement 1: Differences from IAS 17
1. If we use British Airways in Exhibit 12.10 as an indication of accounting
3. Instead of disclosing minimum payments due for each year, the captions
would be “Within one year,” “After more than one year but within five
1. All of AMR’s operating leases would be capitalized using the implicit rate if
known.
2. The existing capital leases would also be recomputed using the implicit
rate if known.
3. AMR would have to evaluate its renewal options to determine whether it
has significant incentives to renew. In addition, it would need to include
4. The income statement and statement of cash flow effects will depend on
whether AMR classifies the leases as Type A or Type B leases. Leased
equipment would be classified as Type A leases and would be accounted
C12-3. Guaraldi Bank, Inc.: Determining lease classification and the times
interest earned ratio (LO 2, 3, 5)
Requirement 1:
As discussed throughout the book, companies do have some discretion in
how they choose to report a given economic transaction. For instance, a
Lenders are not bound by the GAAP definition of financial leverage; instead,
they are more interested in measuring the “true” financial leverage of their
borrowers. Typically, textbooks define the coverage ratio as income before
interest and taxes divided by interest expense. The GAAP definition for
interest expense also includes interest expense on capital leases.
purposes. Based on its current income figures, the company enters into a
credit agreement that requires the company to maintain a times interest
earned ratio of 1.20 on June 30, 2014, which will increase to 1.50 at the end
of September 30, 2014. After entering into the credit agreement, the company
“somehow” restructures the lease agreement to satisfy the definition of an