From the course: Accounting Foundations: Leases
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Implied value of assets used under operating lease contracts
From the course: Accounting Foundations: Leases
Implied value of assets used under operating lease contracts
- Company T reports $200,000 in total assets in its balance sheet. In addition to this $200,000 of reported assets, Company T is also using a large number of leased assets that are being accounted for as operating leases. Remember, because these leases are classified as operating leases, they are not reflected in Company T's reported balance sheet numbers. None of the leased assets are reported in the $200,000 total asset number, and the obligation to make the future lease payments is not reported in the $80,000 total liability number. The payments on these non-cancelable operating leases total $50,000 each year for the next 10 years. Hmm, that seems like a lot. Let's think about this. What is the value on an asset for which you are willing to pay $50,000 each year for the next 10 years? And what is the size of the obligation to which you have agreed if you've contractually promised to make payments of $50,000 each year for the next 10 years? Imagine that you go…
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