Question

Analysis Case 15–4 Lease concepts; Walmart

Real World Financials

Walmart Stores, 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)
	2016	2015
Assets
Property:
Property under capital lease	$11,096	$5,239
Less: Accumulated amortization	(4,751)	(2,864)
Liabilities
Current liabilities:
Obligations under finance leases due within one year	551	287
Long-term debt:
Long-term obligations under finance leases	5,816	2,606

Required:

1.Discuss some possible reasons why Walmart leases rather than purchases most of its premises.

2. The net asset “property under finance lease” has a 2016 balance of $6,345 million ($11,096 – 4,751). Liabilities for finance leases total $6,367 ($551 + 5,816). Why do the asset and liability amounts differ?

3. Prepare a 2016 summary entry to record Walmart’s lease payments, which were $600 million.

4. What is the approximate average interest rate on Walmart’s finance leases? (Hint: See Req. 3)

Answer 1

1. Leasing option is better than buying Because cash flow management is crucial – especially in a more challenging economy – leasing your equipment is an important option. In the long-term, a lease typically costs more than an outright purchase.

However, leasing offers a number of distinct advantages, including:

• preserving your cash and credit;
• managing expenses;
• flexibility;
• tax treatment;
• access to better equipment;
• easy trade-up options.

Leasing typically requires no down payment and allows you to finance 100% of the asset. Sales tax is paid on your monthly payment rather than upfront which further reduces capital outlay. Leasing can help your company remain liquid and grow.

2. Net asset of the property and liabiities can' be same because net value of property derived after amortization where as liabilites derived after payment. moreover, amortization and payment of liabilities can't be same

Hence, on the the basis of above Net asset of the property and liabiities will always be differ

3. Finance lease dr 600

to Bank 600