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3/20/2020
Chapter 10 - Homework Assignment
https://mybusinesscourse.com/platform/mod/quiz/review.php?attempt=3445610&cmid=114575&page=2#
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Question
3
Partially correct
Mark 4.80 out of 6.00
Analyzing and Interpreting Footnote on Operating and Capital Leases
Assume 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, 2010, are as follows:
Years (dollars in millions)
Capital Leases
Operating Leases
2011
$ 83
$ 1,449
2012
71
1,226
2013
67
966
2014
63
796
2015
46
477
Thereafter
143
1,947
Total minimum rental commitments
473
$ 6,861
Less interest and executory costs
(122)
Present value of minimum lease payments
351
Less current installments
(46)
Long-term obligation at December 31, 2010
$ 305
(a) Confirm that the implicit discount rate for Verizon's capital leases is 8.06%.
N
0
1
2
3
4
5
6
7
8
9
Amount
(351)
83
71
67
63
46
46
46
46
5
IRR
(b) What effect does the failure to capitalize operating leases have on Verizon's balance sheet? Over the life of its leases, what effect does this lease
classification have on net income?
Total assets and total liabilities are lower than if the operating lease had been classified as a capital lease. Over the lease term, total rent expense
under operating leases will be equal to the interest and depreciation expense that the company would record under capital leases.
Total assets and total liabilities are lower than if the operating lease had been classified as a capital lease. Over the lease term, total rent expense
under operating leases will be greater than the interest and depreciation expense that the company would record under capital leases.
There is no effect on the balance sheet and income statement as a result of the classification of leases.
Total assets and total liabilities are higher than if the operating lease had been classified as a capital lease. Over the lease term, total rent expense
under operating leases will be equal to the interest and depreciation expense that the company would record under capital leases.
(c) Compute the present value of Verizon's operating leases, assuming an 8.06% discount rate and
rounding the remaining lease term to
3 decimal
places.
(Use a financial calculator or Excel to compute. Do not round until your final answers. Round each Present Value answer to the nearest whole
number.)
($ millions)
Present Value
Year 1
13,241
Year 2
1,050
Year 3
766
Year 4
584
Year 5
350
After 5
1,089
Total*
5,179
* (Use subsequent rounded answers to compute the Total.)
Which of the following statements best describes how we might use this additional information in our analysis of the company?
To assess the company's financial condition and performance, we might add the present value of its operating leases to both operating assets and
nonoperating liabilities. No adjustment is necessary for the income statement.
To assess the company's financial condition and performance, we might add the present value of its operating leases to both operating assets and
nonoperating liabilities, and we can replace rent expense with the depreciation of the lease assets and the interest on the lease liability.
To assess the company's financial condition and performance, we might add the sum of the contractual payments under the operating leases to
both assets and nonoperating liabilities, and we can replace rent expense with the depreciation of the lease assets and the interest on the lease
liability.
Verizon's balance sheet and income statement are prepared in accordance with GAAP. No adjustments are necessary to evaluate the financial
condition of the company.
8.06
%
Mark 1.00 out of 1.00
Mark 0.00 out of 1.00
3/20/2020
Chapter 10 - Homework Assignment
https://mybusinesscourse.com/platform/mod/quiz/review.php?attempt=3445610&cmid=114575&page=2#
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