Capitalizing Operating Leases The following information is taken from the 2014 a

Question

Capitalizing Operating Leases The following information is taken from the 2014 annual report of Delta Air Lines, Inc. (in millions): $54,121 Total assets Total liabilities $45,308 Stockholders equity $8,813 Operating Leases Years Ending December 31, (in millions) Contract Carrier Aircraft Lease Payments Delta Lease Total Payments $1,363 1,187 1,056 881 747 5,873 $11,107 $344 $1,707 306 1,493 267 1,323 239 1,120 182 929 296 6,169 $1,634 $12,741 2015 2016 2017 2018 2019 Thereafter Total minimum lease payments

Explanation / Answer

Present value of opearting lease payment: Year Lease payment Present value @ 5% Present value 2015 1707 0.952381 1625.714 2016 1493 0.907029 1354.195 2017 1323 0.863838 1142.857 2018 1120 0.822702 921.4268 2019 929 0.783526 727.8958 2020 929 0.746215 693.2341 2021 929 0.710681 660.223 2022 929 0.676839 628.7838 2023 929 0.644609 598.8417 2024 929 0.613913 570.3254 2025 929 0.584679 543.1671 2026 595 0.556837 331.3183 Total 12741 9797.982 Rounded to 9800 million a) With operating lease capitalization: Total assets=54121+9800 (long-term asset)=63921 Total liabilities=45308+9800 (capialized lease obligation)=55108 Total laibilities to total assets ratio=55108/63921=0.86 b) Without operating lease capitalization: Total assets=54121 Total liabilities=45308 Total laibilities to total assets ratio=45308/54121=0.84

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