Build a Bear Case - Leases Essay

718 Words Apr 28th, 2014 3 Pages
Kamran Burki

Build-A-Bear Case – Lease

a. Companies lease assets rather than by them because the company might need the asset for only a short period of time. The company might also not want to report an asset or liability or the company simply might not have enough cash to buy the asset. In addition, the company also might have difficulty getting a loan to finance the purchase. b. An operating lease is very similar to a rental agreement. The company does not have ownership of the asset and all the risk and benefits of ownership stay with the lessor. The lessor only transfers the right to use the asset.

A lease is considered a capital lease if it meets the following rules: 1) lease life must be greater than 75% of the
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i) According to footnote 10, rent expense on operating leases in fiscal 2009 was $45.9 and contingent rents were $0.09 (total rent expense $46.9mm). ii) This will be included in the selling, general, and administrative expenses on the income statement.

f. i)

1 | 50,651 | | | .9346 | | 47,338 | 2 | 47,107 | | | .8735 | | 41,143 | 3 | 42,345 | | | .8163 | | 34,566 | 4 | 35,469 | | | .7629 | | 27,059 | 5 | 31,319 | | | .7130 | | 22,330 | 6 | 25,229 | | | .6663 | | 16,810 | 7 | 25,229 | | | .6227 | | 15,710 | 8 | 25,229 | | | .5820 | | 14,683 | PV of minimum lease payments $219,639

Note that the payments after year 2013 are calculated as follows: 75,686/3 = 25,229
Discount rate is calculated as 1/(1+i)^n where i=7% and n = # of years until payment is made.

ii) property and equipment 219,639 capital lease obligation 219,639

iii) interest expense 15,375 capital lease obligation 35,276=============== plug cash 50,651 int. exp = 7% * 219,639

iv) property and equipent:

property & equip 101,044 assets from cap. Lease219,639 Total p & e 320,683

Total assets:

Total assets 284,273
Assets from cap lease219,639
Total assets 503,912

v) cap lease obligation 219,639 current portion of cap lease (35,276) long term obligations under cap lease 184,363

total