Summary Business Accounting

Question:

Delta Airlines provides scheduled air transportation services in the United States. Like many airlines,

Delta leases many of its planes from Boeing Company . In its long-term debt disclosure note included in

the financial statements for the year ended December 31, 2010, the company listed $738 million in lease

obligations. The existing leases had an approximate seven-year remaining life and future lease payments

average approximately $153 million per year.

Required:

1. Determine the effective interest rate the company used to determine the lease liability assuming that

lease payments are made at the end of each fiscal year.

2. Repeat requirement 1 assuming that lease payments are made at the beginning of each fiscal year.



Answer:



Requirement 1

The effective interest rate can be determined by solving for the unknown present value of an ordinary

annuity of $1 factor for seven periods:



PV of an ordinary annuity of $1 factor = $738 = 4.824*

$153



Present value of an ordinary annuity $1: n = 7, i = ? (from Table 4, i = approximately 10%)



In row 7 of Table 4, the value of 4.86842 is in the 10% column. So, 10% is the approximate effective

interest rate. A financial calculator or Excel will produce the same result.