Problem 1: The Remming Corp. has decided to lease an airplane on January 1, 2008. The company and its lessor have not yet decided the terms of the lease. Assume that the terms can be adjusted to permit Remming to either capitalize the lease or record it as an operating lease. After assessing the effect of lease accounting policy on overall financial reporting, Remming chooses to use operating lease approach, instead of capital lease.
(Required)
State (greater, smaller, or no change) & briefly explain the effect of the choosing operating lease over capital lease in 2008 financial reporting (first year of lease) on the following :
a. CF from operations
b. CF from financing
c. CF from investing
d. Debt-to-equity ratio
e. Interest coverage ratio or times interest earned (assume that interest coverage ratio is well above 1)
f. Operating income
g. Net income
h. Deferred tax asset or liability (assume that Remming use capital lease for tax purpose)
i. Return on equity
Problem 2:
YNUS Industries maintains a defined-benefit pension plan covering all its U.S. employees. The projected benefit obligation (PBO) was determined using a discount rate of 8%. The expected rate of compensation growth is 6%, and the expected rate of return on plan assets is 11%. The pension plan is currently over-funded.
(Required)
1. Indicate (higher, lower, no effect) and briefly explain the effect, if any, of an increase in the discount rate on:
a. The PBO in the year of change
b. Pension cost in the year of change
2. Indicate (higher, lower, no effect) and briefly explain the effect, if any, of an increase in the expected rate of compensation growth on:
a. The PBO in the year of change
b. Pension cost in the year of change
3. Indicate (higher, lower, no effect) and briefly explain the effect, if any, of an increase in the expected rate of return on plan assets on:
a. The PBO in the year of change
b. Pension cost in the year of change
4. Explain how you evaluate the reasonableness of the pension-related assumptions (discount rate, growth rate, expected returns) under current economic conditions.