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Q1) American leases different kinds of equipment and property, mainly aircraft and airport facilities. Future minimum lease payments required under capital leases, together with present value of such payments, and future minimum lease payments required 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 interest rate utilized by American to discount rental payments on capital leases is 12% and rentals after 2009 are payable approximately evenly over following 9 years (approximated as $7,525/$838), determine debt equivalent of the operating lease commitments?

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  • Category:- Accounting Basics
  • Reference No.:- M919617

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