California Enterprises Inc. reports the following in its 2016 annual report:
($ thousands)
Required:
a. Calculate the present value of operating lease payments using a discount rate of 5%.
b. California Enterprises' balance sheet reports total assets of $24,109.2 thousand and total liabilities of $6,580.8 thousand. Calculate the company's total liabilities to equity ratio with and without the operating leases being capitalized.
c. Assume that the leased equipment has a useful life of 4 years and no salvage value. Estimate the effect on net operating profit before tax of capitalizing these operating leases. Assume rent expense in 2016 equals 2017 rent expense.
d. Estimate the effect on interest expense of capitalizing these operating leases.

Question

California Enterprises Inc. reports the following in its 2016 annual report:
($ thousands)
  Required: 
a. Calculate the present value of operating lease payments using a discount rate of 5%.
b. California Enterprises' balance sheet reports total assets of $24,109.2 thousand and total liabilities of $6,580.8 thousand. Calculate the company's total liabilities to equity ratio with and without the operating leases being capitalized.
c. Assume that the leased equipment has a useful life of 4 years and no salvage value. Estimate the effect on net operating profit before tax of capitalizing these operating leases. Assume rent expense in 2016 equals 2017 rent expense.
d. Estimate the effect on interest expense of capitalizing these operating leases.

Quizplus · Accepted Answer

The Answer of California Enterprises Inc. reports the following in its 2016 annual report:
($ thousands)
  Required: 
a. Calculate the present value of operating lease payments using a discount rate of 5%.
b. California Enterprises' balance sheet reports total assets of $24,109.2 thousand and total liabilities of $6,580.8 thousand. Calculate the company's total liabilities to equity ratio with and without the operating leases being capitalized.
c. Assume that the leased equipment has a useful life of 4 years and no salvage value. Estimate the effect on net operating profit before tax of capitalizing these operating leases. Assume rent expense in 2016 equals 2017 rent expense.
d. Estimate the effect on interest expense of capitalizing these operating leases.