Analyzing, Interpreting and Capitalizing Operating Leases Assume YUM! Brands, In
ID: 2736970 • 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 $245 million and $228 million, respectively.
(a) Confirm that the implicit rate on YUM!'s capital leases is 8.36%.
Using a 8.36% 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)?
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. There is no effect on the income statement.
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.
1.00 points out of 1.00
(b) YUM! reported total liabilities of $6,103 million for 2010. Would the adjustment from part (a) make a substantial difference to YUM!'s total liabilities?
Yes, YUM!'s liabilities would increase, but there would be no effect on assets.
Yes, YUM!'s assets would increase, but there would be no effect on its liabilities.
No, adjustments are not required. So, there is no effect on YUM!'s balance sheet.
1.00 points out of 1.00
Commitments ($ millions) Capital Operating 2011 $ 27 $ 422 2012 27 367 2013 65 339 2014 23 378 2015 23 280 Thereafter 276 1,964 $ 441 $ 3,750Explanation / Answer
Solution:
Present value of minimum payments under capital leases At December 25, 2010 was $245 million
December 26, 2009, the present value of minimum payments under capital leases was $228 million
Therefore
245/(1+r) = 228
Or 228 *(1+r) = 245, r =8.36 (approx.)
Present value of operating leases using a interest rate of 8.36%
Year
Operating
Present value
1
422
389.443
2
367
312.556
3
339
266.436
4
378
274.167
5
28
18.742
6
1964
1213.186
2474.530
Year
Operating
Present value
1
422
389.443
2
367
312.556
3
339
266.436
4
378
274.167
5
28
18.742
6
1964
1213.186
2474.530