# Documentation

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NORTH DAKOTA UNIVERSITY SYSTEM
CAPITAL LEASE DETERMINATION
INSTRUCTIONS

This worksheet was designed to determine if a lease is a capital lease or operating lease. Complete
the cells in the "Analysis" sheet, then click on the "Calculate Capital or Operating" button (this button
must be clicked again if data is changed in Col. E). Click on the "Amortization Table" button and fill in
the requested information. Click "OK" to see an amortization schedule for the lease payments. Click
on the "Terms" sheet to see the calculation results.

The worksheet uses the four tests for a capital lease from FASB 13 - Accounting for Capital Leases.
If a lease meets any one of these four tests it is a capital lease. The worksheet makes all calculations
for the lease once the correct information is input on the "Analysis" sheet. The following items are
used to explain the logic behind the calculations.

Determining the Amount to Capitalize:
The amount to be capitalized for the lease is the lower of the total present value or the fair market
value. The total present value is calculated by using the lower of the lessor’s implicit rate (if known) or
the lessee’s incremental borrowing rate.

Determining the Interest Rate to use to Amortize Lease Payments:
If the total present value is less than the fair market value then you use the interest rate used to
calculate the total present value (lower of lessor’s implicit rate or the lessee’s incremental borrowing
rate). If the fair market value is less than the total present value then you must impute an interest
rate. To impute you use trial and error to figure the interest rate that makes the present value of the
lease payments and bargain purchase option (if present) equal to the fair market value. The present
value of the lease payments is calculated as an annuity while the bargain purchase option is a single
lump sum payment.

Bargain Purchase Options:
A bargain purchase option if present (test 2) will affect the lease calculations in two ways. First it
must be used to impute the interest rate if necessary. Second the bargain purchase option is
considered the final payment on the lease in the amortization schedule. This means that after the
final lease payment the lease principal remaining should equal the bargain purchase option. If the
lease payments are made at the beginning of the period (annuity due), there is some interest that
accumulates between the last payment and the payment of the bargain purchase option which will be
reflected in the bargain purchase option payment. An example of a lease with a bargain purchase
option is included with this documentation.

Last updated 2/7/05

797a5bc5-14ce-497e-a83f-86684098081e.xls/Documentation
5/11/2010

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797a5bc5-14ce-497e-a83f-86684098081e.xls/Documentation
LEASE INFORMATION

Date completed:
Completed by:

Does the lessee assume ownership? (Y/N)                          n

Fair market value of asset at lease inception              \$92,625.00
Asset's total economic life                                  30.00
Asset's remaining economic life

Amount of down payment or trade-in (if any)
Minimum lease payment                                      \$10,000.00
Bargain purchase price (if any)                              \$0.00
Lessor's inv tax credit at lease inception (if known)        \$0.00
Lease term in years                                          20.00
Lease payment structure:
(A)nnual / (S)emi-Annual / (Q)uarterly / (M)onthly              a
(B)eginning of periods / (E)nd of periods                       b
Lower of the lessee's incremental
borrowing rate or, if known, the lessor's
implicit rate                                                10.0%
NORTH DAKOTA UNIVERSITY SYSTEM
CAPITAL LEASE DETERMINATION

Leased Item:                                                 Institution:
0

[ALL FORMULA DRIVEN, NO DATA ENTRY NECESSARY]
Test 1: Lease Transfers Ownership                                                  If the lease transfers ownership, then it is a
capital lease.
Does the lessee assume ownership? (Y/N)                        N
0
Test 2: Bargain Purchase Option                                                    If the lease contains a bargain-purchase clause
Is there a bargain purchase option? (Y/N)                      N                allowing you to buy the asset for substantially
Bargain purchase price                                                \$0.00     less than fair value of the asset at the end of the
lease, it is a capital lease.
Present value of bargain purchase price                               \$0.00
0
Test 3: Term = 75% of Economic Life                                                If the lease term equals 75% or more of the
Lease term in years                                                 20.00       asset's estimated economic life, it is a capital
lease. However, if the beginning of the lease
Asset's total economic life                                         30.00       falls within the last 25% of the asset's total
Asset's remaining economic life                                      0.00       estimated economic life, it is NOT a capital
lease.
Percent of remaining life at start of lease                        0.00%
0
Test 4: Present Value of Lease Payments
Minimum lease payment                                        \$10,000.00         If the present value of the minimum lease
payments (plus downpayment and pv of
(A)nnual / (S)emi-Annual / (Q)uarterly / (M)onthly             A                bargain purchase) is 90% or more of the
(B)eginning of periods / (E)nd of periods                      B                asset's fair value, it is a capital lease.
Fair market value of asset at lease inception                \$92,625.00
Amount of down payment or trade-in                                \$0.00
Lessor's inv tax credit at lease inception                        \$0.00
Lower of the lessee's incremental borrowing rate or,
if known, the lessor's implicit rate                        10.00%
The amortization table will determine whether
Conclusion:                                                                         to capitalize the asset at the lower of FMV or
the PV of the MLP. If FMV is used, the
Capital Lease                                                                       imputed rate will be calculated and used in
1
the table.

0            01/00/00
MISCELLANEOUS CALCULATIONS

Number of annual payments                                             1
Present value of MLP                                         \$93,649.20
Lessee's total present value                                 \$93,649.20
PV-of-payments/Mkt value                                       101.11%
Computed imputed interest rate                         NA

Calculation of imputed rate
Low                        0.052350976
Mid                          5.24%
High                       0.052350979
PV Payments                         \$128,570.86
PV BPO                             \$0.00
Total PV                        \$128,570.86
5/11/2010
LEASE AMORTIZATION TABLE

LESSOR:                                      LESSEE:                        DESCRIPTION OF LEASED ITEM:

LEASE CLAUSES:
First Payment Date:                1/2/2006
Capitalized Value:              \$92,625.00 Fair Market Value
Lease Obligation:               \$92,625.00
Interest Rate:                      12.00% per year
Annual Payment:                 \$10,000.00
Term of Lease:                        20.00 years
Capital Lease Criteria:     Meets 90% of FMV Criteria

PAYMENT                                                   INTEREST                            LEASE
#                         DATE         PAYMENT         EXPENSE        PRINCIPAL          OBLIGATION
\$92,625.00
1             1/2/2006         \$10,000.00       \$0.00            \$10,000.00     \$82,625.00
2             1/2/2007         \$10,000.00     \$9,915.00              \$85.00     \$82,540.00
3             1/2/2008         \$10,000.00     \$9,904.80              \$95.20     \$82,444.80
4             1/2/2009         \$10,000.00     \$9,893.38             \$106.62     \$82,338.18
5             1/2/2010         \$10,000.00     \$9,880.58             \$119.42     \$82,218.76
6             1/2/2011         \$10,000.00     \$9,866.25             \$133.75     \$82,085.01
7             1/2/2012         \$10,000.00     \$9,850.20             \$149.80     \$81,935.21
8             1/2/2013         \$10,000.00     \$9,832.23             \$167.77     \$81,767.43
9             1/2/2014         \$10,000.00     \$9,812.09             \$187.91     \$81,579.53
10             1/2/2015         \$10,000.00     \$9,789.54             \$210.46     \$81,369.07
11             1/2/2016         \$10,000.00     \$9,764.29             \$235.71     \$81,133.36
12             1/2/2017         \$10,000.00     \$9,736.00             \$264.00     \$80,869.36
13             1/2/2018         \$10,000.00     \$9,704.32             \$295.68     \$80,573.68
14             1/2/2019         \$10,000.00     \$9,668.84             \$331.16     \$80,242.53
15             1/2/2020         \$10,000.00     \$9,629.10             \$370.90     \$79,871.63
16             1/2/2021         \$10,000.00     \$9,584.60             \$415.40     \$79,456.22
17             1/2/2022         \$10,000.00     \$9,534.75             \$465.25     \$78,990.97
18             1/2/2023         \$10,000.00     \$9,478.92             \$521.08     \$78,469.89
19             1/2/2024         \$10,000.00     \$9,416.39             \$583.61     \$77,886.27
20             1/2/2025         \$10,000.00     \$9,346.35             \$653.65     \$77,232.63
Total                                          \$200,000.00    \$184,607.63         \$15,392.37

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