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In: Accounting

Below is the leasing footnote disclouse from UPS 2015 10-K report: The following table sets for...

Below is the leasing footnote disclouse from UPS 2015 10-K report:

The following table sets for the aggregate minimum lease payments under operating leases (in millions): The implicit interest rate is 7%

Year Operating LEase

2016 $324

2017 $263

2018 $197

2019 $125

2020 $84

After 2020 $252

What adjustments would be made to UPS's Balance Sheet to capitalize the operating leases at the end of 2015?

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Expert Solution

In order to capitalize the operating leases, there are three adjustments that need to be made in any companies’ balance sheet; Present value of all future lease payments, Interest expenses and Depreciation.

So, we need to first calculate the present value of all future lease obligation payment.

Formula: Present Value = Future Value * Present Value Factor
Please refer to Present Value tables for Present Value factor

Year

Amount

PV Factor

Present Value

2016

324

0.9345794

$302.80374

2017

263

0.8734387

$229.71439

2018

197

0.8162979

$160.81068

2019

125

0.7628952

$95.36190

2020

84

0.7129862

$59.89084

After 2020

252

0.7129862

$179.67252

Total

$1,028.25406

Note: Payment going towards operating lease after 2020 is truncated to terminal value; hence $252 will be treated as terminal value.

Interest Expense = $1,028.25406 x 7% = $71.97778
Depreciation Expense = $1,028.25406/5 = $205.6508

So, the adjustments to be made are $1,028.25406 in “Assets” and “Liabilities” both, $71.97778 under “Interest expenses” and $205.6508 under “Depreciation Expense”.

ekkarill92 answered 1 year ago
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