Question

Capitalizing Operating Leases
The 2014 10 -K report of CVS Health Corporation included the following footnote.

Leases

The Company leases most of its retail and mail order locations, ten of its distribution centers and certain corporate offices under noncancelable operating leases, typically with initial terms of 15 to 25 years and with options that permit renewals for additional periods. The Company also leases certain equipment and other assets under noncancelable operating leases, typically with initial terms of 3 to 10 years. Minimum rent is expensed on a straight-line basis over the term of the lease. In addition to minimum rental payments, certain leases require additional payments based on sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, which are expensed when incurred.

The following table is a summary of the Company's net rental expense for operating leases for the years ended December 31

(in millions)	2014	2013	2012
Minimum rentals	$2,495	$2,385	$2,340

The following table is a summary of the future minimum lease payments under capital and operating leases as of December 31, 2014

(in millions)	Capital Leases	Operating Leases
2015	$67	$2,454
2016	67	2,395
2017	67	2,296
2018	68	2,182
2019	68	2,036
Thereafter	748	17,669
Total future lease payments	1,085	$29,032
Less: imputed interest	(439)
Present value of capital lease obligations	$646

The Company finances a portion of its store development program through sale-leaseback transactions. The properties are generally sold at net book value, which generally approximates fair value, and the resulting leases generally qualify and are accounted for as operating leases. The operating leases that resulted from these transactions are included in the above table. The Company does not have any retained or contingent interests in the stores and does not provide any guarantees, other than a guarantee of lease payments, in connection with the sale-leaseback transactions. Proceeds from sale-leaseback transactions totaled $515 million in 2014, $600 million in 2013 and $529 million in 2012.

Prepare the journal entry to record CVS's rent expense under operating leases on December 31, 2014. Assume that this expense was paid in cash and none of this expense was prepaid or accrued in other years.

Enter amounts in millions.

General Journal
Description	Debit	Credit
Rent expense or Cash?	Answer	Answer
Rent expense or Cash?	Answer	Answer

Assume that CVS reclassified its operating leases as capital leases and that the appropriate discount rate is 4%. What amount would CVS report as a lease liability in its December 31, 2014 balance sheet?

Round to the nearest whole number.

$Answer million

If these leases are treated as capital leases instead of operating leases, what would be the effect on CVS's 2015 income statement? The assets are depreciated on a straight-line basis over 10 years.

Use rounded answer above to calculate. Round answers to the nearest whole number.

2015 interest expense $Answer million

2015 depreciation expense $Answer million

Show the results of capitalization using the financial statement effects template.

Use negative signs with answers when appropriate.

Balance Sheet Transaction Cash Asset + Noncash Assets = Liabilities + Contrib. Capital + Earned Capital Capitalizeoperatingleases Answer + Answer = Answer + Answer + Answer

Income Statement Revenue - Expenses = Net Income Answer - Answer = Answer

Answer 1

PART I:

General Journal
Date	Description	Debit	Credit
December 31,2014	Rent Expense	$        2,495
	Cash		$        2,495
	(Being Operating Lease Payment Recorded)

PART II:

Amount to reported as Lease Liability if reclassification is done:

Total Future Operating Lease Rental = $ 29,032
Discount Rate: 4 %

2015	$            2,454
2016	$            2,395
2017	$            2,296
2018	$            2,182
2019	$            2,036
Thereafter	$         17,669
Total Future Lease Rentals	$         29,032
Less: Imputed Interest	$         (7,887)
	$         21,145

PART III:

2015 Interest Expense : $ 72

2015 Depreciation Expense : $ 2179