Prepare the adjusting journal entries required

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Reference no: EM131442944

Financial Statement Analysis Workshop Tutorial Assignment

Adjusting for operating leases

Airline companies typically do not own their aircrafts. Rather, they lease aircrafts from commercial lessors (e.g. General Electric's finance subsidiary). According to US GAAP, companies are required to disclose their lease information in the footnotes of their financial statements.

Recall from ACCT2011 that leases can be classified into finance leases (or capital leases in American English) and operating leases (US GAAP and IFRS apply virtually the same rules to leases). Airlines may structure their lease contracts to skilfully avoid the capitalization requirement for capital leases. The footnote on leases of the 2016 annual report of Delta Air Lines, a major US airline, is attached.

Additional information & assumptions

Recapitalized operating lease asset is 80% of the existing operating lease liability if the operating leases were capitalized. The difference between the lease asset and lease liability reflects accumulated depreciation and impairments from previous years.
New leases initiated in 2016 are assumed to take effect from the end of 2016.
Recapitalized lease assets are depreciated over a useful life of 10 years.
Lease obligations due after 5 years from the reporting date ("thereafter") are evenly distributed to the next 8 years.
Ignore any tax effect.

Required -

Prepare the adjusting journal entries required to capitalize Delta's operating leases, and verbally describe the impact of the recapitalization of operating leases on the 2016 financial statement of Delta Air Line.

Attachment:- Assignment File.rar

Reference no: EM131442944

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Reviews

len1442944

3/28/2017 5:36:31 AM

I would like help in the steps on calculating the discount rate and the adjusting journal entries required to capitalize operating leases. Relevant information is provided in the attachment. Note, of course, there are genuine operating leases. In real cases, we must examine the circumstances extensively to determine the precise proper classification of leases. Also, firms who may misclassify leases are not necessarily violating accounting standards (most of them do not). Lease contracts can be structured carefully to get around the rigid requirements of the standards for capital leases.

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