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Q1) At December 31, 2004, American Airlines had 231 jet aircraft under operating leases and 94 aircraft under capital leases. Lease disclosures accompanying America's 2004 financial statements are reproduced below:

American leases different kinds of equipment and property, mainly aircraft and airport facilities. Future minimum lease payments needed under capital leases, together with present value of such payments, and future minimum lease payments needed under operating leases which have initial or remaining non-cancelable leases terms in excess of one year as of December 31, 2004, were (in millions):

Year ending December 31, Capital leases Operating leases
2005 $211 $1,066
2006 233 999
2007 187 982
2008 225 931
2009 174 838
2010 and subsequent 950 7,525
  1,980 $12,341

Less amount representing interest 815, Present value of net minimum lease payments $ 1,165

American's capital lease liability is reported among other debt on balance sheet. Company's debt totaled $25,567 million. Some analysts might consider operating lease commitments as equivalent to debt when assessing financial risk. If American's operating leases were considered capital leases, lease payments would be capitalized at present value of all future payments.

problem:

If operating lease commitments are considered equivalent to debt, determine percentage of American's debt is represented by lease liabilities?

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  • Category:- Accounting Basics
  • Reference No.:- M919623

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