BBEFORE ENTERING INTO THE LEASE, SANDY’S LONG TERM DEBT-TO-EQUITY...

79) B

Before entering into the lease, Sandy’s long term debt-to-equity ratio was ($1,700,000 / ($600,000 +

$4,600,000) =) 0.327. The printing press lease is a capital lease because the lease period is at least 75

percent of the asset’s life (8 / 10 > 0.75). The minimum interest rate between the lease’s implicit rate (seven

percent) and the lessee’s incremental borrowing rate (six percent) is used to capitalize the lease. The

present value of the lease payments is (PV annuity N = 8, I / Y = 6, PMT = 1,000) $6,209,794. This amount

is added to the asset side as Net Leased Asset, and to the liabilities and equity side as Lease Liability.

Sandy’s revised long-term debt-to-equity ratio is ($1,700,000 + $6,209,794) / ($600,000 + $4,600,000) =