CASE INFORMATION RK Corp, a publically traded NASDAQ company (symbol ARK), is a manufacturer of electrical automobiles. Based in Chicago, the company has been operating since 1996. The company sells their electric automobiles to auto manufacturers as well as the retail market on a worldwide basis. Its major clients are Ford, General Motors and Toyota. Ark has captured about 10 percent of the world market of the electrical automobile sales. Its stock sells at 25 US Dollars per share, and its 52-week price range is between 19.75 and 27.15 US Dollars, with a market cap of 10.6 billion dollars. Their financial statements presented below for the year ending December 31, 2011 has been prepared using GAAP (Tables 1 and Table 2). The controller would like to see the effect of IFRS treatment of leases on the financial statements, and you have been assigned this task. In particular, the controller would like to see the impact GAAP and IFRS differences have on balance sheet, income statement and selected financial ratios. The company would like to adapt IFRS by as early as next year as it is considering a new stock issue in the Tokyo Stock Exchange, which requires IFRS compliance. ADDITIONAL INFORMATION Ark entered into a lease on January 1, 2011 with the following terms: 1. Ark leased specialized machinery manufactured by the lessor, Bell Corp., which will enable Ark to manufacture their electric cars in a much more efficient manner. This machinery does not have a resale market and was made specifically for Ark to meet its specifications. 2. The lease term is for 3 years with a minimum lease payment of $10,000. Payment is due on December 31 of each year, with the first payment due on December 31, 2011. At the end of year 3, Ark has the option of leasing the equipment for one additional year for $2,500. At the end of the lease term, ownership reverts to the lessor. There is no option to buy the equipment. 3. The lessee will pay all executor costs. 4. The estimated useful life of the lease is 49 months (4 and 1/12 years.) 5. The fair market value of the equipment is $30,000. 6. The implicit rate of Bell Corp. is 6 percent, and the lessee, Ark, knows this. 7. The incremental borrowing rate of Ark is 7 percent. QUESTIONS 1- Differentiate between an operating lease and a capital/ financing Lease for GAAP financial reporting purposes. 2- Under GAAP, has this been treated as a capital lease / financing Lease for Ark or an operating lease? 3- Under IFRS, should this lease be classified as an operating or a financing lease?
CASE INFORMATION RK Corp, a publically traded NASDAQ company (symbol ARK), is a manufacturer of electrical automobiles. Based in Chicago, the company has been operating since 1996. The company sells their electric automobiles to auto manufacturers as well as the retail market on a worldwide basis. Its major clients are Ford, General Motors and Toyota. Ark has captured about 10 percent of the world market of the electrical automobile sales. Its stock sells at 25 US Dollars per share, and its 52-week price range is between 19.75 and 27.15 US Dollars, with a market cap of 10.6 billion dollars. Their financial statements presented below for the year ending December 31, 2011 has been prepared using GAAP (Tables 1 and Table 2). The controller would like to see the effect of IFRS treatment of leases on the financial statements, and you have been assigned this task. In particular, the controller would like to see the impact GAAP and IFRS differences have on balance sheet, income statement and selected financial ratios. The company would like to adapt IFRS by as early as next year as it is considering a new stock issue in the Tokyo Stock Exchange, which requires IFRS compliance. ADDITIONAL INFORMATION Ark entered into a lease on January 1, 2011 with the following terms:
1. Ark leased specialized machinery manufactured by the lessor, Bell Corp., which will enable Ark to manufacture their electric cars in a much more efficient manner. This machinery does not have a resale market and was made specifically for Ark to meet its specifications.
2. The lease term is for 3 years with a minimum lease payment of $10,000. Payment is due on December 31 of each year, with the first payment due on December 31, 2011. At the end of year
3, Ark has the option of leasing the equipment for one additional year for $2,500. At the end of the lease term, ownership reverts to the lessor. There is no option to buy the equipment. 3. The lessee will pay all executor costs.
4. The estimated useful life of the lease is 49 months (4 and 1/12 years.)
5. The fair market value of the equipment is $30,000.
6. The implicit rate of Bell Corp. is 6 percent, and the lessee, Ark, knows this.
7. The incremental borrowing rate of Ark is 7 percent.
QUESTIONS 1- Differentiate between an operating lease and a capital/ financing Lease for GAAP financial reporting purposes.
2- Under GAAP, has this been treated as a capital lease / financing Lease for Ark or an operating lease?
3- Under IFRS, should this lease be classified as an operating or a financing lease?
4- Describe the different reporting results between GAAP and IFRS and review the necessary
5- Prepare an income statement under IFRS for year 1. Assume that the net income remains the same under IFRS as it does for GAAP and any difference is reconciled in the tax expense and tax payable accounts.
6- Prepare balance sheet under IFRS for Year 1.
7- Compute the following ratios for Year 1, under both IFRS and GAAP reported totals. Comment on your findings.
a.
b. Quick Ratio
c. Cash Ratio
d. Times Interest Earned
e. Debt to Capital Ratio
f. Debt to Shareholder Equity Ratio
8. Find the financial statements for the two airlines your team has been assigned (see last page) and answer the following questions:
a. What assets (and amounts) do the airlines disclose that they lease (include a screenshot)?
b. What is the amount of the current and long-term liability related to the leases shown in the balance sheet?
c. Is there anything shown in the income statement related to leases? If so, what and how much?
d. In the statement of cash flows, what amount is reported as outflows related to leases? What section is it presented in?
e. Review the notes to the financial statements and identify what was acquired in the current year using lease agreements. What were the assets and their value?
f. What amount of principal was paid on these new leases in the current year?
Hi student
Since there are multiple subparts, we will answer only first three subparts. If you want the answer for remaining sub parts then please re-post the remaining sub parts.
Lease accounting refers to the accounting standards and guidelines used to record and report lease transactions in a company's financial statements. The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have developed specific rules and regulations related to lease accounting.
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