Question

Analysis Case 15-4 Lease concepts; Walmart QL015–1 though 1015-4 Real World Financials Walmart 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: Balance Sheet ($ in millions) 2017 2016 $11,637 $11,096 (5,169) (4,751) Assets Property: Property under finance lease obligations Less: Accumulated amortization Liabilities Current liabilities: Finance lease obligations due within one year Long-term debt: Long-term finance lease obligations 565 551 6,003 5,816 Required: 1. The net asset "property under finance lease obligations" has a 2017 balance of $6,468 million ($11,637 - $5,169). Liabilities for these leases total $6,568 ($565 + $6,003). Why do the asset and liability amounts differ? 2. Prepare a 2017 summary entry to record Walmart's lease payments, which were $ 800 million. 3. What is the approximate average interest rate on Walmart's finance leases? (Hint: See Req. 2) 4. Discuss some possible reasons why Walmart leases rather than purchases most of its premises.

Answer 1

Walmart inc. Requirement 1 When capital leases are documented first, both assets and liabilities rise by minimum lease payments present value. In later years, though, the amounts differ. Leased assets are reduced by depreciation. Lease liabilities are reduced by the lease payments' principal portion. Requirement 2 ($ in millions) Interest expense (difference) a/c Dr. Lease payable (current obligation: given) a/c To Cash (lease payment: given) 249 551 Dr. 800 Requirement 3 2017 interest (from requirement 3) = 249 Beginning balance in lease liability-given: $551 + $5,816 = $6,367 Approximate average interest rate = $249 / $6,367 = 0.03910 = 3.91% Requirement 4 Leasing helps a company to preserve assets, to avoid certain risks of having assets and get promising tax benefits. At times leasing is also used as a means of off balance sheet financing. When amount is borrowed to acquire an asset, the liability has a unfavorable effect on the debt equity ratio of the company and other mechanical pointers of riskiness. The acquired asset also increases total assets and therefore reduces calculations of the assets rate of return. In spite of research that indicates that market is not fooled, managers continue to not report assets and liabilities by leasing instead purchasing and by constructing lease agreements in such a way that capitalizing the assets and liabilities is not needed Whether or not there is any real influence on prices of security, off balance sheet financing can allow a company avoids exceeding pledged limits on selected financial ratios such as debt equity ratio.