Question

Analyzing and Interpreting Footnote on Both Operating and Capital Leases Verizon Communications Inc. provides the following footnote relating to its leasing activities in its 10-K report. The aggregate minimum rental commitments under noncancelable leases for the periods shown at December 31, 2014, are: (in millions) 2015 2016 2017 2018 2019 Thereafter Capital Leases Operating Leases $2,499 2,245 1,960 1,660 1,369 4,670 $14,403 $181 137 113 68 60 Total minimum rental commitments 598

Answer 1

Computation of the lease obligation is shown below: Lease obligation = Total rental commitment - Interest costs = $598 million -$82 million = $516 million Thus, the obligation is $516 million. The lease obligation is the difference between the total rental commitment and interest costs. The operating lease is treated as an expense when such expenses are paid. These expenses are recorded in the income statement as expenses. The asset is not recorded by the lessee and therefore no obligation is recorded in operating lease. The $516 is the total present value of the obligation. It does not include the interest cost which is paid to the lessor. The total obligation to the lessor is $598 which is required to be paid by the lessee to the lessor. Computation of the interest on capital lease for 2015 as shown below: Interest expenses = Lease payment - Current installement = $181 million -$158 million = $23 million Thus, the interest expenses for 2015 are $23 million. The interest expense is the difference between the lease payment and the current installment. The journal entry to record the lease payment for 2015 as follows: Dates Description Lease liability Interest expenses Cash (To record the payment of lease liability) Post ref. Debit(s) Credit(S) $158 $23 S181

The payment of lease liability will decrease the lease obligation. When any liability is decreased, then the related liability account should be debited. Hence, the lease liability is debited. All the expenses and losses are of debit nature when such expenses and losses are incurred by the company. The interest expenses on lease are incurred by the company and hence, it is debited. The payment of lease obligation will decrease in the cash account of the company. When any asset account is decreased, then such an asset account of the company should be credited. Hence the cash account is credited. (d) Computation of the present value of the operating lease is shown below: 2 в с D Present Value Year Operating Leases PV Factor at 5% Present value 2499 =POWER(1/1.05,1) =(C4*D4) 2245 =POWER(1/1.05.2) =(C5*D5) 2017 1960 =POWER(1/1.05,3) =(C6*D6) 2018 1660 POWER(1/1.05,4) =(C7*D7) 1369 POWER(1/1.05,5) =(C8D8) Thereafter 4670 =POWER(1/1.05.6) (C9*D9) 2019 Present Value of leases =SUM(E4:E9)

The result of the above excel table is as follows: B C DE Present Value Year Operating Leases PV Factor at 5% Present value 2015 $ 2,499 0.952 $ 2,380.00 2016 $ 2.245 0.907 $ 2.036.28 2017 $ 1,960 0.864 $1,693.12 2018 $1,660 0.823 S 365.60 2019 $ 1,369 0.784 $ 1.072.65 Thereafter $ 4,670 0.746 $ 3.484.83 Present Value of leases $ 12,032.56 Thus, the present value of the operating lease is $12,032.56.