CFAI Mock 2012 Morning Session Q40

In this question, they have assumed BGN mode for the lease PV calculation. Are we supposed to consider this in by default? I know from level 1 that unless specified, we were supposed to calculate in END mode.

Please forgive. I noticed that they have given that payment is due on Jan 1st.

I think there is an error in this question. Surely the first lease payment goes into current debt not long term debt, so it doesn’t affect the long term debt to assets ratio? What do you guys think?

That’s a very interesting one Kia and I know only YOU can point out this. Technically, yes you are right. But do they nitpick to this level in off balance sheet adjustments? Can you please respond to the other thread on question 41?

I think you should mail this to CFAI and find out why it is not being categorized as current liability. If you want, I can do it for you.

Yes please email them!

i would have thought it should be put into current debt. The balance sheet they give you in the mock exam has long term debt and current debt categories so I don’t see why they wouldn’t expect you to allocate it properly! But maybe I’m over thinking it. :slight_smile:

No actually you are not. This is a very logical point I would say. I mean I get confused like this in every other question. Perhaps I am still lacking the depth.

Mailed but you know what they may have made it simpler for dumb a**es like me. :slight_smile:

wow Kiakaha, you certainly know your stuff well. i didn’t even think about the first payment. i just treated the entire PV of MLP as a whole and added it onto LTD/A. i guess the question shouldn’t have included the words “long term”, then it would have been fine.

With a capital lease, won’t the value of the asset at each payment drop by depreciation + interest while the value of the obligation only drops by principal? In that case, the asset drops more than the liability?

Asset dropping by interest. Are you sure?

I’m less than 5% sure on that. - so disregard. And I havent seen the question, but CFA is explicit that lease payments are typically made at the beginning.

I’m a little interested to see how this works - does the PV of the future lease payments get adjusted at every reporting date? It must. The current portion should be the same at every yearly reporting date (just the proportion of principal and interest will differ). Is it possible to add in a cap lease and have the Assets: LT debt ration stay the same?

Bear with me here:

Assets = 400

LT Liabilities = 300

Ratio = 1.333

Add in PV Of operating lease = 100

Assets = 500

IF the LT portion of Liabilities is adjusted to ~385, the ratio stays the same (in this instance, 15 would flow to current portion). Could you construct a lease where the PV of the future lease payments is 100 (where the next payment = 15)?

Not sure if an example could be worked out like that, but is an example of where the ratio could stay constant. Any other instance would cause the ratio to change (which is more likely since, the next payment due will be greater than the amount of the average payment left due to the Present Value calc)