Can someone explain the solution? I am completely lost on this one.
It’s asking to calculate Adjusted long-term debt to assets ratio and it’s taking the PV of operating lease payments…
I’ll take a stab at it.
You’ve got an operating lease that will become a finance lease. Which means the liability has to come onto the balance sheet. What will that value be other than the present value of it’s lease payments?
So you have to bring all the lease payments to present value. You have 4 annuity payments at 130 and 4 payments at 80 (the 80 payment plus 3 others at 80 (240/3)). You bring that to present value. The calculations are shown in the answer. Where I got tripped up was that the lease payments were January 1st, so you have to change the mode on your calculator to “BGN” to calculate the first annuity. The 6% is given in Note 18.
So now you have the present value of the liability of 710.2
You then adjust the long term debt by adding 710.2 to it, and also add that to Assets. Then your Adjusted long-term debt/asset ratio is 2,057/20,807 or 9.9%
Any other important points?
By the way – did anyone change their calculator mode to BGN for this? I don’t ever remember having to do that ever.
for this one i did not, i used the Cash flow method (CF), method NPV starting year 1, it avoid changing the beg mode