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Lease Footnote Southwest, impact on FS of leases

Accounting for Leases

1. Which of the following is false?
A. The lessee uses the lower of its incremental borrowing rate or the lessor's desired return rate (if known) when determining the present value of minimum lease payments.
B. A lease is capitalized if the present value of the minimum lease payments is greater than or equal to 75% of the estimated fair market value of the leased asset.
C. An operating lease is an example of off-balance-sheet financing.
D. Including a guaranteed residual value makes it more likely that a lessee will capitalize a lease.
2. Distinguish between rental payments and minimum lease payments. Indicate what is included in minimum lease payments.
3. What is the major financial statement difference between an operating lease and a capital lease for a lessee?

Financial Statement Analysis

Many businesses lease capital assets rather than purchasing them. Southwest Airlines is one such company. Use the company's 2012 financial statements and the related notes to answer the following questions. You can ignore the section of the lease note that discusses the sale/leaseback transactions. The 2012 annual report of Southwest Airlines can be found here: http://www.sec.gov/Archives/edgar/data/92380/000119312513041608/d480533d10k.htm

1. Does Southwest have any capital leases at the end of 2012? If yes, what assets are being leased in this manner and what is net value of these assets in the property and equipment section of the company's Balance Sheet?
2. What assets are being leased under operating leases at the end of 2012?
3. How much rental expense did Southwest incur on its operating leases during 2012? Where are these rental expenses included on the Income Statement?
4. What are some of the characteristics or provisions of Southwest's (as lessee) leases?
5. What amount did Southwest report as its total future minimum annual rental commitments under noncancelable operating leases?
6. At 12/31/12, what was the total present value of the minimum lease payments under Southwest's capital leases?

Solution Preview

Accounting for Leases

1. Which of the following is false?
A. The lessee uses the lower of its incremental borrowing rate or the lessor's desired return rate (if known) when determining the present value of minimum lease payments.
B. A lease is capitalized if the present value of the minimum lease payments is greater than or equal to 75% of the estimated fair market value of the leased asset.
C. An operating lease is an example of off-balance-sheet financing.
D. Including a guaranteed residual value makes it more likely that a lessee will capitalize a lease.

B: The rule is when the minimum lease payments is greater or equal to 90% of the FV.

2. Distinguish between rental payments and minimum lease payments. Indicate what is included in minimum lease payments.

Rental payments are the routine payment, ...

Solution Summary

Your guidance includes a cut and paste of the Southwest 2012 lease footnote with relevant amounts circled to show you how to find these items.

$2.19