Analyzing and Capitalizing Operating Lease Payments Disclosed in Footnotes Costc
ID: 2645584 • Letter: A
Question
Analyzing and Capitalizing Operating Lease Payments Disclosed in Footnotes
Costco Wholesale Corporation discloses the following in footnotes to its 10-K report relating to its leasing activities.
At the end of 2013, future minimum payments...under non-cancelable leases with terms of at least one year were as follows ($ millions):
Operating leases are not reflected on-balance-sheet. In our analysis of a company, we often capitalize these operating leases, that is, add the present value of the future operating lease payments to both the reported assets and liabilities.
(a) Compute the present value of Costco's operating lease payments assuming a 6% discount rate and round the remaining lease term to the nearest whole year. (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.)
Explanation / Answer
($ millions) Operating Lease Payment Discount Factor (i=0.06);1/(1+ i)^n Present Value (operating lease payment x discount factor) Year 1 $189 0.943 $178.30 Year 2 $175 0.890 $155.75 Year 3 $167 0.840 $140.22 Year 4 $160 0.792 $126.73 Year 5 $153 0.747 $114.33 After 5 $1,753 7.89 $901.71 ** Total* $2,597 $1,617.04 Average life = $1753/$153 = 11.46 periodss we rounded to 11 periods Present value of an annuity of 11 periods @ 6% 7.89 Year 5 lease payment x year 5 discount value x PV annuity of 11 periods @ 6%; $153 x 0.747 x 7.89 $901.71