1. Cabela’s Corp. disclosed the following lease information in its 2013 10-K (in
ID: 2419824 • Letter: 1
Question
1. Cabela’s Corp. disclosed the following lease information in its 2013 10-K (in millions). What lease liability does Cabela’s report on its balance sheet?
Capital Leases
Operating Leases
2014
$ 1,000
$ 16,035
2015
1,000
20,956
2016
1,000
20,489
2017
1,000
20,098
2018
1,000
26,516
Thereafter
17,500
269,619
Total
22,500
$373,713
Amount representing interest
(10,081)
Net present value of leases
$ 12,419
a. $22,500
b. $12,419
c. $373,713
d. $10,081
None of the above
Capital Leases
Operating Leases
2014
$ 1,000
$ 16,035
2015
1,000
20,956
2016
1,000
20,489
2017
1,000
20,098
2018
1,000
26,516
Thereafter
17,500
269,619
Total
22,500
$373,713
Amount representing interest
(10,081)
Net present value of leases
$ 12,419
Explanation / Answer
FINANCE LEASE ACCOUNTING
Initial accounting
The initial accounting is that the lessee should capitalise the finance leased asset and set up a lease liability for the value of the asset recognised. The accounting for this will be:
Dr Non-current assets
Cr Finance lease liability
(This should be done by using the lower of the fair value of the asset or the present value of the minimum lease payments*.)
*Note: The present value of the minimum lease payments is essentially the lease payments over the life of the lease discounted to present value
Operating lease accounting
As the risks and rewards of ownership of an asset are not transferred in the case of an operating lease, an asset is not recognised in the statement of financial position. Instead rentals under operating leases are charged to the statement of profit or loss on a straight-line basis over the term of the lease, any difference between amounts charged and amounts paid will be prepayments or accruals.
Therefore, the lease liability to be reported by Cabela's Corp. on its Balance sheet will be the net present value of all the lease payments i.e. $12419. (Option (b) )
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