Analyzing, Interpreting and Capitalizing Operating Leases Assume YUM! Brands, In
ID: 2480964 • Letter: A
Question
Analyzing, Interpreting and Capitalizing Operating Leases
Assume YUM! Brands, Inc., reports the following footnote relating to its capital and operating leases in its 2010 10-K report ($ millions).
Future minimum commitments under non-cancelable leases are set forth below. At December 25, 2010, and December 26, 2009, the present value of minimum payments under capital leases was $318 million and $228 million, respectively.
(a) Confirm that the implicit rate on YUM!'s capital leases is 4.30%.
Using a 4.30% discount rate and rounding the remaining lease life to three decimal places, compute the present value of YUM!'s operating leases. (Use a financial calculator or Excel to compute. Do not round until your final answers. Round each answer to the nearest whole number.)
* (Use subsequent rounded answers for calculation.)
Which of the following statements best describes the adjustments we might consider to YUM!'s balance sheet and income statement from the information in part (a)?
YUM's total assets and total liabilities are increased by the present value of the capitalized leases. In its income statement, rent expense is replaced with depreciation, and interest expense is added to nonoperating expense.
YUM's total assets and total liabilities are increased by the present value of the capitalized leases. There is no effect on the income statement.
Rent expense is replaced with depreciation and interest expense is added to nonoperating expense. There is no effect on the balance sheet.
YUM's total assets and total liabilities are increased by the present value of the capitalized leases. In its income statement, rent expense is replaced with depreciation.
(b) YUM! reported total liabilities of $6,103 million for 2010. Would the adjustment from part (a) make a substantial difference to YUM!'s total liabilities?
Yes, YUM!'s assets and liabilities would be substantially higher following the adjustments suggested.
Yes, YUM!'s liabilities would increase, but there would be no effect on assets.
Yes, YUM!'s assets would increase, but there would be no effect on its liabilities.
No, adjustments are not required. So, there is no effect on YUM!'s balance sheet.
Please answer all parts of the question.
Commitments ($ millions) Capital Operating 2011 $ 27 $ 428 2012 27 453 2013 65 417 2014 23 390 2015 23 330 Thereafter 276 1,958 $ 441 $ 3,976Explanation / Answer
a) confirming impkicit rate at 4.30%
AMong statements
statement 1is is coerect, there will be increase in both assets and liabilities with present value
and rent expense is replaced by depreciation, interest is non operating expense. Income statement will be affected.
b) Yes adjustmensts are required as it will affect both assets and liabilities side to record present value of capitalised lease
Note: with point of calculating present value of operating lease , it has been written round of remaining life of lease to 3 decimals. Statement can't be understood
Capital Pv Factor Lease Discounted Year at 4.30 % Amount Value 1 0.959 27 25.89 2 0.919 27 24.82 3 0.881 65 57.29 4 0.845 23 19.44 5 0.810 23 18.63 6 0.777 23 17.87 7 0.745 23 17.13 8 0.714 23 16.42 9 0.685 23 15.75 10 0.656 23 15.10 11 0.629 23 14.47 12 0.603 23 13.88 13 0.579 23 13.31 14 0.555 23 12.76 15 0.532 23 12.23 16 0.510 23 11.73 17 0.489 23 11.24 318 Million