Many companies have a form of debt called capital leases. A capital lease is created when a company agrees to rent an asset, such as equipment or a building, for such a long time that GAAP treats the lease as if the asset were purchased using borrowed funds. A capital lease creates a liability for the company that acquired the leased asset because it has promised to make payments to another company for several years in the future. If a company has any capital leases, it must disclose them in the footnotes to the financial statements, and will sometimes disclose them in a separate account in the liabilities section of the balance sheet.
Using the most current Forms 10-K for Union Pacific Corporation, complete the requirements below. To obtain the 10-Ks use either the EDGAR system following the instructions in Appendix A, or the company’s website.
Required
a. What was Union Pacific’s debt to assets ratio? (You will need to compute total liabilities by subtracting “Common shareholders’ equity” from total assets.)
b. How much interest expense did Union Pacific incur?
c. What amount of liabilities did Union Pacific have as a result of capital leases? Footnote 5 presents information about Union Pacific’s leases.
d. What percentage of Union Pacific’s long-term liabilities was the result of capital leases?
e. Many companies try to structure (design) leasing agreements so their leases will not be
classified as capital leases. Explain why a company such as Union Pacific might want to avoid reporting capital leases.