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Chapter 5: Q. 21-BP-e (page 531)

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:

In \( millions

In \) millions

Current assets

\(70

Current liabilities

\)30

Fixed assets

\(70

Long-term liabilities

\)30

Total liabilities

\(60

Stockholder’s equity

\)80

Total assets

\(140

Total stockholder’s equity and liabilities

\)140

The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.

e. In an efficient capital market environment, should the consequences of SFAS No. 13, as viewed in the answers to parts c and d, change stock prices and credit ratings?

Short Answer

Expert verified

The information regarding lease obligations were already provided in footnotes of balance sheet, so the revised balance sheet won’t have an impact on the stock prices and credit ratings of the company.

Step by step solution

01

Meaning of SFAS no. 13

The SFAS no 13 states the method of reporting the entity’s leases in its financial statements. This regulation helps in determining if a particular lease should be reported as an operating or capital lease by the lessor and lessee.

02

Impact of SFAS no. 13 on stock prices and credit ratings of Ellis corporation

The company had provided the information regarding its lease obligations in the footnotes of the financial statements, so the financial statement users were already aware of these obligations. The reporting of lease obligations in the balance sheet will not have an impact on the credit ratings and stock prices.

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