Question

Please use the information below to calculate the [1] 75% and 90% rule and [2] converting operating lease to capital lease. Question 1 - AAA corporation leases an asset to BBB corporation for 12 years beginning Jan 1, year 1 at annual rental of $7,000. The first payment is due at the beginning of the first year. The asset's economic life is 15 years and FMV of the asset at the inception of the lease $50,000. The lease require the BBB to pay $1,000 annual executory cost. The lease does not transfer ownership non contain a bargain purchase option. Interest 4%. Please use 75% and 90% to calculate qualification.

Answer 1

	FOR 75 % qualification
Inputs
Operating lease expense in current year =				$       5,250.00
Year	Commitment
1	$       5,250.00
2	$       5,250.00
3	$       5,250.00
4	$       5,250.00
5	$       5,250.00
6 and beyond	$       5,250.00
Pre-tax Cost of Debt =		4.00%
From the current financial statements, enter the following
Reported Operating Income (EBIT) =			$     10,000.00
Reported Debt =			$     25,000.00
Reported Interest Expenses =			$       2,000.00
Output
Number of years embedded in yr 6 estimate =			1
Converting Operating Leases into capital lease
Year	Commitment	Present Value
1	$       5,250.00	$       5,250.00
2	$       5,250.00	$       5,250.00
3	$       5,250.00	$       5,250.00
4	$       5,250.00	$       5,250.00
5	$       5,250.00	$       5,250.00
6 and beyond	$       5,250.00	$       5,048.08
Debt Value of leases =		$     31,298.08
New Financials
Operating Income with leases classified as debt =				$     11,251.92
Debt with leases classified as debt =				$     56,298.08
Operating lease adjustment
Reported Operating income =			$50,000.00
+ Current year's operating lease expense =			$5,250.00
- Depreciation on leased asset =			$1,000.00
Adjusted Operating Income			$54,250.00

FOR 90 % Qualification

	FOR 75 % qualification
Inputs
Operating lease expense in current year =				$       6,300.00
Year	Commitment
1	$       6,300.00
2	$       6,300.00
3	$       6,300.00
4	$       6,300.00
5	$       6,300.00
6 and beyond	$       6,300.00
Pre-tax Cost of Debt =		4.00%
From the current financial statements, enter the following
Reported Operating Income (EBIT) =			$     10,000.00
Reported Debt =			$     25,000.00
Reported Interest Expenses =			$       2,000.00
Output
Number of years embedded in yr 6 estimate =			1
Converting Operating Leases into capital lease
Year	Commitment	Present Value
1	$       6,300.00	$       6,300.00
2	$       6,300.00	$       6,300.00
3	$       6,300.00	$       6,300.00
4	$       6,300.00	$       6,300.00
5	$       6,300.00	$       6,300.00
6 and beyond	$       6,300.00	$       6,057.69
Debt Value of leases =		$     37,557.69
New Financials
Operating Income with leases classified as debt =				$     11,502.31
Debt with leases classified as debt =				$     62,557.69
Operating lease adjustment
Reported Operating income =			$50,000.00
+ Current year's operating lease expense =			$6,300.00
- Depreciation on leased asset =			$1,000.00
Adjusted Operating Income			$55,300.00