intermediate acct Spiceland 7e Case 15 1 and 6
Case 15-1
1) The result for requirement 1 through 3 will vary depending on the date of the financial statement. The analysis will be the same even though the date is different. Lease Obligations shows that the present value of net lease payments for capital lease obligations was $626,000,000.
2) The capital lease liability would increase by about 24 if the operating leases were capitalized. Note 6 shows that the future lease payments are about 12 times higher than capital lease. The lease payments for operating leases would be about $626,000,000 X 12 = $7,512 million.
Capital Leases
Years Ending December 31,
(in millions) 2011 214
2012 193
2013 160
2014 130
2015 124
The rest 404 Total minimum lease payments 1,225
Less: amount of lease payments representing interest (487)
Present value of future minimum capital lease payments 738
Plus: unamortized premium, net 7
Less: current obligations under capital leases (119)
Long-term capital lease obligations 626 Operating Leases For Years ending December 31, 2011-finish Delta Lease payments = $11,109 Contract Carrier Aircraft Lease Payments = $3,837 Total = $14,946
3) Increase in debt automatically will increase in risk generally. Debt requires to be paid back, interest will be added to the principal if we fail to pay it on time, and could also lead to bankruptcy. Debt to equity ratio is to measure the risk of the company.
Debt to equity ratio for Delta =
[$43,188-897]/$897= 47.1
If debt increase by $7,512 million, the debt to equity ratio will increase to be =
([$43,188-897]+7,512)/$897= 5.5
Debt can be useful if the company utilize it to earn more money in excess of the cost of borrowing the funds.
Case 15-6
1) The benefits for leasing are to reduce risk of owning assets and get a favorable tax benefits. When company is borrowing funds, it increases the debt to equity ratio therefore increase the business risk. On
1) The result for requirement 1 through 3 will vary depending on the date of the financial statement. The analysis will be the same even though the date is different. Lease Obligations shows that the present value of net lease payments for capital lease obligations was $626,000,000.
2) The capital lease liability would increase by about 24 if the operating leases were capitalized. Note 6 shows that the future lease payments are about 12 times higher than capital lease. The lease payments for operating leases would be about $626,000,000 X 12 = $7,512 million.
Capital Leases
Years Ending December 31,
(in millions) 2011 214
2012 193
2013 160
2014 130
2015 124
The rest 404 Total minimum lease payments 1,225
Less: amount of lease payments representing interest (487)
Present value of future minimum capital lease payments 738
Plus: unamortized premium, net 7
Less: current obligations under capital leases (119)
Long-term capital lease obligations 626 Operating Leases For Years ending December 31, 2011-finish Delta Lease payments = $11,109 Contract Carrier Aircraft Lease Payments = $3,837 Total = $14,946
3) Increase in debt automatically will increase in risk generally. Debt requires to be paid back, interest will be added to the principal if we fail to pay it on time, and could also lead to bankruptcy. Debt to equity ratio is to measure the risk of the company.
Debt to equity ratio for Delta =
[$43,188-897]/$897= 47.1
If debt increase by $7,512 million, the debt to equity ratio will increase to be =
([$43,188-897]+7,512)/$897= 5.5
Debt can be useful if the company utilize it to earn more money in excess of the cost of borrowing the funds.
Case 15-6
1) The benefits for leasing are to reduce risk of owning assets and get a favorable tax benefits. When company is borrowing funds, it increases the debt to equity ratio therefore increase the business risk. On