Question

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 disclosures 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 w/in 1 yr	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 requirment 3)

Answer 1

1. Possible reasons for leasing rather than purchase:

a) In leasing, cash payments are lower than purchases (cash purchases or purchase by taking loan) as generally no down payment is required

b) The payment under lease are tax deductible.

c) It allows more flexibility as more working capital is available.

d) More options are are available for lease of premises as compared to purchase of premise.

e) Leasing process takes less time as cmpared to buying process.

2. Difference between the amount of asset and liability:

Liability for finance lease has two components - Principal amount and interest portion. The amount of interest goes on decreasing as principal amount is repaid in lease payments. The amount of interest paid and the depreciation charged are not equal and hence there is a difference between property under finance lease and liabilities for finance lease.

3. Lease payment summary entry:

Liability for finance lease Dr.	287
Finance Costs Dr	313
To Bank		600

4. Approximate average interest rate

Total outstanding amount as on 2015 = 2606+287=2893

Finance cost paid during 2016 = 313 (3 above)

Average interest rate= 313/2893*100= 10.82%