1. Chapt. 16 Capital Lease & debt ratios 1 Chapter 16 Leases as Capital Assets;Debt Ratios Ref: page 757  763 DO: p.768 BE16-12,13,14 p.770 E16-11,12,13 p.773 P16-9A p.777 BYP16-2, 8

2. Chapt. 16 Capital Lease & debt ratios 2 Car rental is an example of an operating lease LEASE LIABILITIES OPERATING LEASE p.757 In an __________________ the intent is ___________ use of the property by the lessee with continued ownership of the property by the lessor. The ________________________ are recorded as an _________ by the lessee (renter) and as _________ by the lessor (landlord).

3. Chapt. 16 Capital Lease & debt ratios 3 LEASE LIABILITIES CAPITAL LEASES p.758 A capital lease transfers substantially all the __________________________ from the lessor to the lessee (“renter”). = In a capital lease, the present value of the cash payments for the lease are ____________ and recorded as an _____.

4. Chapt. 16 Capital Lease & debt ratios 4 LEASE LIABILITIES CAPITAL LEASES p.758 The lessee must _____________________ (a capital lease) if any one of the following conditions exist: 1.the lease transfers ownership of the property to the lessee (e.g., contains a bargain purchase option). 2.The lease term is equal to 75% or more of the economic life of the leased property. 3.The present value of the lease payments equals or exceeds 90% of the fair market value of the leased property.

5. Chapt. 16 Capital Lease & debt ratios 5 ACE leases a 747 from GE Aviation on May 8 th. The lease period is for 15 years and the economic life of the airplane is 20 years. The present value of the lease is $185 million and the fair market value of the plane is 200 million. There is no transfer of ownership from GE to ACE  Why has ACE has essentially purchased the airplane?....why lease instead of buy? Journalize the capital lease:

6. Chapt. 16 Capital Lease & debt ratios 6 CAPITAL LEASE ENTRIES The ___________ is reported on the balance sheet under___________. The portion of the lease liability expected to be paid in the next year is reported as a _______ ______. The remainder is classified as a ____ _______________ If none of the four conditions for capitalizing a lease are met, the company does not report an asset. This procedure is referred to as off- balance sheet financing….like rent

7. Chapt. 16 Capital Lease & debt ratios 7 DEBT TO TOTAL ASSETS p.759 The debt-to-total-assets ratio indicates the percentage of total assets owed to creditors, providing one measure of leverage. It is calculated by dividing total debt by total assets.   Total DebtTotal Assets Debt to Total Assets  

8. Chapt. 16 Capital Lease & debt ratios 8 INTEREST COVERAGE RATIO p.760 The interest coverage ratio measures the company’s ability to meet interest payments as they come due. It is calculated by dividing income before interest expense, income tax expense and amortization expense (EBITA) by interest expense  EBITA Interest Expense Interest Coverage  