Question

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The company disclosed the following lease information in its 2018 annual report related to its leasing...

The company disclosed the following lease information in its 2018 annual report related to its leasing activities (in millions).

Capital leases

Operating leases

2019

$307

$2,471

2020

286

2,302

2021

262

1,202

2022

251

980

2023

116

830

After 2023

703

9,130

Total

$1,925

$16,915

Amount representing interest

(754)

Present value of net minimum lease payments

$1,171

What effect does the failure to capitalize operating leases have on the company’s balance sheet? Over the life of the lease, what effect does this classification have on net income?

Solutions

Expert Solution

Operating lease are not capitalized as in case of operating lease risk and reward with lessor and lessee has to return the assets after completion of specified period to lessor. The payments made to lessor are recognized as expense and only impact on income in case of operating lease will be lease payment being made as it's absolute amount. The lesee don't incur other running or administartion cost of assets
Finance lease
In case of finance/ capital lease, the assets are capitalized and depreciation is claimed thereon in financial statements. At the end of lease terms, lessee will get the ownerhship of the assets depending upon clause in lease agreement
Impact of net income
Operating lease- Payment made for lease are recognized as expense only. That is only impact on net income
Finance Lease
1. Recognized lease as an asset & liability at inception at fair value not exceeding present value of lease payments
2.Apportion lease payment brought forward finance charges and reduce outstanding liability during lease period
3.Depreciation to be charged on assets

ekkarill92 answered 1 year ago
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