Question

Consider footnote 4 from the 2018 annual report of Ori Inc.:

The Company utilizes certain equipment under capital and operating leases, which expire at

various dates throughout 2028. A summary of future minimum lease payments under capital leases

and non-cancellable operating leases at December 31, are as follows:

Years ending December 31: CapitalLeases OperatingLeases

2019 $ 101 $ 800

2020 97 800

2021 96 800

2022 65 800

2023 55 800

After 2023 166 4,000

Total minimum lease payment 580

Less: Amounts representing interest 130

Present value of future minimum capital lease payments 450

On its Balance Sheet, the Company reported “Leased Assets (net)” in the amount of $500. The

estimated remaining life for these assets is 10 years and they are amortized based on a straight line.

Ori Inc. did not sign any additional new leases in 2019 and did not dispose of any of its leased

assets during that year. Minimum capital lease payments are made on December 31 of each year.

Assume an interest rate of 8% per annum.

Required:

a. Compute the interest and principal to be paid on Capital Leases during fiscal 2019. What is the

total lease related expense (both capital and operating) reported for fiscal 2019?

b. New accounting rules are in effect, and starting 2019 all Operating Leases are reported on the

balance sheet like Capital Leases. Ori Inc. will need comparison amounts for 2018 to be

included on its 2019’s balance sheet. Use the following assumptions: cost of capital is 8%, the

payments after 2023 are spread evenly over five years and the payments are made annually on

December 31 of each year (2024 to 2028). By how much would long-term debt on the 2018’s

balance sheet have increased if the new statement was already been adopted? Could you say

whether total assets would increase by more or less than that amount? Explain.

Answer 1

1.

Year ending	Capital lease ($)	Present value ($)
2019	101	93.52
2020	97	83.16
2021	96	76.21
2022	65	47.78
2023 and onwards	221	150.41
	580	451.07

	$
Principal	93.52
Interest	7.48
Operating lease expenses	800
Total lease related expense in 2019	807.48

2.

Year ending	Lease payments ($)	Present value ($)
2019	800	740.74
2020	800	685.87
2021	800	635.07
2022	800	588.02
2023	800	544.47
2024	800	504.14
2025	800	466.79
2026	800	432.22
2027	800	400.20
2028	800	370.55
	8,000.00	5,368.07

The long term debt would have increased by $5,368.07 and the asset would have increased by the equal amount.