4.12 Review Questions: Chapter Four

1. In what manners are Operating Leases and Capital Leases accounted for differently?
2. In what three ways can a firm pay for a capital asset acquisition?
3. You are given the following Capital Lease information. Calculate the value of the capitalized asset and lease obligation on the Balance Sheet. Construct your own template.
   • HIZ, Inc. is going to lease some equipment for 3 years at an annual charge of $400,000 – payable at the end of each year.
   • There will be no salvage value
   • HIZ’ borrowing rate is 5%.
4. Amortize the liability balance for each of the three years.

Solution to Questions #3 #4:

Year 0:            PV = ($400,000) (2.7232) = $1,089,280 (Opening Liability Balance)

Year 1:            (0.05) ($1,089,280) = $54,464 (Interest)

    $400,000 (Payment) minus $54,464 = $345,536 (Amortization)

    $1,089,280 – 345,536 = $743,744 (Liability Balance)

Year 2:            (0.05) ($743,744) = $37,187 (Interest)

    $400,000 – 37,187 = $362,813 (Amortization)

    $743,744 – $362,813 = $380,931 (Liability Balance)

Year 3:            (0.05) ($380,931) = $19,047 (Interest)

     $400,000 – $19,047 = $380,953 (Amortization)

      $380,931 – $380,953 ≈ 0 (Final Liability Balance – with small rounding error)