Question

1. Refer to disclosure note 22 following Target’s financial statements. What is the amount reported for “capital” leases (shown as the present value of minimum lease payments)? What is the total of those lease payments? What accounts for the difference between the two amounts?
2. What is the total of the operating lease payments? New lease accounting guidance (discussed in Chapter 15) will require companies to report operating leases at present value as well as capital leases (now called finance leases). If Target had used the new lease accounting guidance in its 2016 financial statements, what would be the amount reported for operating leases? Hint: Assume the payments “after 2020” are to be paid evenly over a 16 years period and all payments are at the end of years indicated. Target indicates elsewhere in its financial statements that 6% is an appropriate discount rate for its leases.

Answer 1

(fig. in millions)
1…
Note:22 (Page 50)
Total future minimum lease payments	2001
Present value of minimum lease payments	1152
Difference is due to interest (at inception date)	849

2..
Total of the operating leases	4153
If Target had used the new lease accounting guidance in its 2016 financial statements, amount reported for operating leases would be:
8150.488 (as calculated below)

Year	Amount in millions
2018		227
2019		234
2020		226
2021	222*(1-1.06^-16)/0.06=	2243.509
2022	217*(1-1.06^-16)/0.06=	2192.979
After2022		3027
Total		8150.488