Safeway is a large U.S. supermarket chain. Safeway leases the majority of its store locations. Disclosure regarding

Question:

Safeway is a large U.S. supermarket chain. Safeway leases the majority of its store locations. Disclosure regarding these leases follows.

Safeway'Lessee Disclosures

Note E: Lease Obligations

Approximately two-thirds of the premises that the Company occupies are leased. The Company had approximately 1,600 leases at year-end 2004, including approximately 230 that are capitalized for financial reporting purposes. Most leases have renewal options, some with terms and conditions similar to the original lease, others with reduced rental rates during the option periods. Certain of these leases contain options to purchase the property at amounts that approximate fair market value.

As of year-end 2004, future minimum rental payments applicable to non-cancelable capital and operating leases with remaining terms in excess of 1 year were as follows (in millions):

Safeway is a large U.S. supermarket chain. Safeway leases the

Future minimum lease payments under non-cancelable capital and operating lease agreements have not been reduced by minimum sublease rental income of $161.5 million.
Amortization expense for property under capital leases was $43.4 million in 2004, $35.4 million in 2003 and $42.4 million in 2002. Accumulated amortization of property under capital leases was $230.9 million at year-end 2004 and $181.6 million at year-end 2003.
The following schedule shows the composition of total rental expense for all operating leases (in millions). In general, contingent rentals are based on individual store sales.

From this information, answer the following questions.
1. Does Safeway have any leases that include bargain renewal options? Are these leases accounted for as capital leases?
2. At the beginning of 2004, Safeway's assets leased under capital leases had a recorded historical cost of $696.8 million. What average useful life is Safeway using to amortize its leased assets? Ignore the possibility of new capital leases signed or old capital leases expired during the year.
3. In addition to the minimum lease payments, Safeway must also make additional lease payments if store sales exceed certain specified amounts. Do these extra payments constitute a large portion of periodic operating lease expense?
4. Estimate the present value of the minimum lease payments for the operating leases. Use the following two techniques:
(a) Assume that the same ratio between present value and total gross amount of future minimum lease payments that holds for the capital leases also holds for the operating leases.
(b) Assume that the minimum operating lease payment stream can be approximated by a $358 million per-year annuity for 13 years. Use a 10% discount rate.
Comment on whether your two answers are in approximateagreement.

Annuity
An annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,...