Capitalizing Operating Leases
Just wanted to go over this to make sure I have it right.
Year Lease PMT PVLeasePMT Int. PNCPL.ReductioN Lease Depreciation Tax Deduction
2006 5.07 4.70 1.79 3.28 19.86 3.86 5.65
2007 4.94 4.25 1.54 3.40 16.46 3.86 5.39
2008 4.94 3.95 1.28 3.67 12.79 3.86 5.13
2009 4.94 3.67 0.99 3.95 8.84 3.86 4.85
2010 4.94 3.40 0.69 4.26 4.59 3.86 4.54
2011 4.94 3.16 0.36 4.59 0.00 3.86 4.21
Company A states the following operating lease payments from 2006-2011. I made the following adjustments to the financial statements:
1. Eliminated the operating lease (ex. $5.07M) from the income statement each year.
2. Added interest (ex. $1.79M) to interest expense each year.
3. Added D&A to the income statement each year (ex. $3.86M)
(I believe I’m treating the income statement right through the first 3 steps, as total operating leases are equal to total (depreciation + interest expenses). The problem comes with how my numbers flow through the cash flow statement and balance sheet (steps show below).
4. The total PV of lease payments ($23.12M) will be added to the long-term debt under liabilities on the balance sheet. I’m not sure if is the correct number to be adding to debt. Each year, this will be reduced by the principal reduction number (ex. $3.28M in 2006) until all remaining debt is written off.
6. Total depreciation ($3.86M * 6 = $23.13M) is also added to the balance sheet. This is reduced each year by $3.86M.
Cash Flow Statement
7. Depreciation will flow through the cash flow statement under cash flow from operations. It will also be deducted through net PP&E.
8. Annual interest payments will flow through the finance section under the cash flow statement? I’m not really sure how interest expense should flow through the balance sheet and cash flow statement. Any help here would be appreciated.
Thanks in advance for any help clearing this up. You don’t have to go through each step I listed; it might be better to just list how capitalizing operating expenses will affect different sections of the 3 major financial statements. I feel that I’m treating the income statement right, but I’m not very clear on how these changes will impact the balance sheet and cash flow statement.
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