Below is the Operating Lease note from the financial statements of Rocky Mountai
ID: 2499952 • Letter: B
Question
Below is the Operating Lease note from the financial statements of Rocky Mountain Chocolate Factory, Inc. for the year ended February 28, 2015:
Operating Leases
The Company conducts its retail operations in facilities leased under non-cancelable operating leases.
The following is a schedule by year of future minimum rental payments required under such leases for the years ending February 28 or 29:
2016
$
995,000
2017
753,000
2018
677,000
2019
617,000
2020
293,000
Thereafter
56,000
Total
$
3,391,000
Assume that RMC’s cost of capital is 2.5%. Further, assume that RMC depreciates its facilities over 10 years using the straight-line method of depreciation with no salvage value.
1) How do you calculate the PVIF for 2016 and 2017?
2) If RMC capitalized its operating leases (that is, treated them as capital leases), by how much would net income differ as a result in 2016 and 2017? Clearly show, label and explain your computations.
2016
$
995,000
2017
753,000
2018
677,000
2019
617,000
2020
293,000
Thereafter
56,000
Total
$
3,391,000
Explanation / Answer
1.PVIF for 2016 and 2017
Year Amount PV factor PV inflow
2016 $ 995,000 .9756 970,722
2017 $ 753,000 .9518 716,705
2. RMC capitalised operating lease. Difference in net income for 2016 and 2017
Capitalisation of lease will increase profit in
2016 by $ 995,000/-
2017 by $ 753,000/-
Operating lease capitalisation will reduce the expense to the extent of yearly operating lease payment
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