Analyze the implications for Build-A-Bear Workshop of a change in lease accounting consistent with current proposals by FASB and IASB. You should write up your analysis in the form of a business memo (not just answers to the case questions). Your memo should:
• Incorporate the following and may include additional relevant information.
a. What is an operating lease? What is a capital lease?
b. Why do accountants distinguish between different types of leases?
c. Calculate the present value of the minimum lease payments at December 28, 2013 (the final day of fiscal 2013). Assume the implicit rate of interest is 7%. Use the future minimum lease payments disclosed in Note 11, Commitments and Contingencies. Assume that all lease payments are made on the final day of each fiscal year. Also assume that payments made subsequent to 2018 are made evenly over three years.
d. If Build-A-Bear Workshop had entered into all of these leases on the last day of the year (December 28, 2013), what journal entry would the company have recorded if the leases were considered capital leases?
e. What journal entry would the company record in fiscal 2014 for these leases if they were considered capital leases?
f. What would the company have reported as “Property and equipment, net” at December 28, 20123As Total assets?
g. What would the company have reported as “Long-term obligations under capital leases” at December 28, 2013? As current liabilities? As Total liabilities?
h. How would key financial ratios be affected? Consider the potential impact on the current ratio, debt-to-equity ratio, and long-term debt-to-equity ratio.
• Explicitly state your conclusion – the likely implications of the change on Build-A-Bear.
• Follow the format guidelines in the handout on writing business memos on the BbLearn.
• Should be 2 pages plus table(s) or appendix with any supporting numbers/analysis.
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Leases are an important features for Build- a- Bear (BAB) company. It can be classified as operating and Capital lease. The difference between both types is that in case of operating lease, all the future payments are treated as expense and it will simply be deducted from the revenue in income statement whereas in case of capital lease, it is treated as assets and the entire present value...
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