# 4.12 Review Questions: Chapter Four

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)