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CHAPTER 15 Leases 915 Required: 1. How would increasing the depreciation period affect American Movieplex’s earnings? 2. Does revising the estimate pose an ethical dilemma? 3. Who would be affected if Person’s suggestion is followed? Wal-Mart Stores, Inc., is the world’s largest retailer. A large portion of the premises that the company occupies are leased. Its financial statements and disclosure notes revealed the following information: Real World Case 15–5 Lease concepts; Walmart ● LO15–1 through LO15–6 Balance Sheet ($ in millions) 2014 2013 Assets Property: Property under capital lease $5,589 $5,889 Less: Accumulated amortization (3,046) (3,147) Liabilities Current liabilities: Obligations under capital leases due within one year 309 327 Long-term debt: Long-term obligations under capital leases 2,788 3,023 Real World Financials Real World Financials Required: 1. Discuss some possible reasons why Walmart leases rather than purchases most of its premises. 2. The net asset “property under capital lease” has a 2014 balance of $2,543 million ($5,589 2 3,046). Liabilities for capital leases total $3,097 ($309 1 2,788). Why do the asset and liability amounts differ? 3. Prepare a 2014 summary entry to record Walmart’s lease payments, which were $600 million. 4. What is the approximate average interest rate on Walmart’s capital leases? (Hint: See requirement 3) FedEx Corporation, the world’s largest express transportation company, leases much of its aircraft, land, facilities, and equipment. A portion of those leases are part of sale and leaseback arrangements. An excerpt from FedEx’s 2013 disclosure notes describes the company’s handling of gains from those arrangements: Real World Case 15–6 Sale-leaseback; FedEx ● LO15–10 Deferred Gains Gains on the sale and leaseback of aircraft and other property and equipment are deferred and amortized ratably over the life of the lease as a reduction of rent expense. Required: 1. Why should companies defer gains from sale-leaseback arrangements? 2. Based on the information provided in the disclosure note, determine whether the leases in the leaseback portion of the arrangements are considered by FedEx to be capital leases or operating leases. Explain. General Tools is seeking ways to maintain and improve cash balances. As company controller, you have proposed the sale and leaseback of much of the company’s equipment. As seller-lessee, General Tools would retain the right to essentially all of the remaining use of the equipment. The term of the lease would be six years. A gain would result on the sale portion of the transaction. The lease portion would be classified appropriately as a capital lease. You previously convinced your CFO of the cash flow benefits of the arrangement, but now he doesn’t understand the way you will account for the transaction. “I really had counted on that gain to bolster this period’s earnings. What gives?” he wondered. “Put it in a memo, will you? I’m having trouble following what you’re saying to me.” Required: Write a memo to your CFO. Include discussion of each of these points: 1. How the sale portion of the sale-leaseback transaction should be accounted for at the lease’s inception. 2. How the gain on the sale portion of the sale-leaseback transaction should be accounted for during the lease. 3. How the leaseback portion of the sale-leaseback transaction should be accounted for at the lease’s inception. 4. The conceptual basis for capitalizing certain long-term leases. Communication Case 15–7 Where’s the gain? ● LO15–1 LO15–2 LO15–3 LO15–10


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