Analyzing and Capitalizing Operating Lease Payments Disclosed in Footnotes Costco Wholesale Corporation discloses the following in footnotes to its 10 K report relating to its leasing activities Future minimum payments during the next five fiscal years and thereafter under non cancelable leases with terms of at least one year, at the end of 2010, were as follows ($ millions) 2011 $ 162 2012 157 2013 155 2014 148 2015 134 Thereafter 1,572 Total minimum payments $ 2,328 Operating leases are not reflected on balance sheet In our analysis of a company, we often capitalize these operating leases, that is, add the present value of the future operating lease payments to both the reported assets and liabilities (a) Compute the present value of Costco's operating lease payments assuming a 6 discount rate and round the remaining lease term to the nearest whole year (Use a financial calculator or Excel to compute Do not round until your final answers Round each answer to the nearest whole number ) ($ millions) Present Value Year 1 $Answer Year 2 Answer Year 3 Answer Year 4 Answer Year 5 Answer After 5 Answer Total $Answer (Use subsequent rounded answers for calculation ) (b) What effect does capitalization of operating leases have on Costco's total liabilities and total assets (it reported total liabilities and total assets of $12,885 million and $23,815 million, respectively) In its income statement, rent expense is replaced with depreciation and interest expense There is no effect on the balance sheet The company's total assets and total liabilities are increased by the present value of the capitalized leases In its income statement, rent expense is replaced with depreciation and interest expense The company's total assets and total liabilities are increased by the present value of the capitalized leases There is no effect on the income statement The company's total assets and total liabilities are increased by the present value of the capitalized leases In its income statement, rent expense is replaced with interest expense

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Analyzing and Capitalizing Operating Lease Payments Disclosed in Footnotes Costco Wholesale Corporation discloses the following in footnotes to its 10-K report relating to its leasing

Analyzing and Capitalizing Operating Lease Payments Disclosed in Footnotes Costco Wholesale Corporation discloses the following in footnotes to its 10-K report relating to its leasing activities. Future minimum payments...during the next five fiscal years and thereafter under non-cancelable leases with terms of at least one year, at the end of 2010, were as follows ($ millions):

2011

$ 162

2012

157

2013

155

2014

148

2015

134

Thereafter

1,572

Total minimum payments

$ 2,328

Operating leases are not reflected on-balance-sheet. In our analysis of a company, we often capitalize these operating leases, that is, add the present value of the future operating lease payments to both the reported assets and liabilities. (a) Compute the present value of Costco's operating lease payments assuming a 6% discount rate and round the remaining lease term to the nearest whole year. (Use a financial calculator or Excel to compute. Do not round until your final answers. Round each answer to the nearest whole number.)

($ millions)	Present Value
Year 1	$Answer
Year 2	Answer
Year 3	Answer
Year 4	Answer
Year 5	Answer
After 5	Answer
Total*	$Answer

* (Use subsequent rounded answers for calculation.)

(b) What effect does capitalization of operating leases have on Costco's total liabilities and total assets (it reported total liabilities and total assets of $12,885 million and $23,815 million, respectively)?

In its income statement, rent expense is replaced with depreciation and interest expense. There is no effect on the balance sheet.

The company's total assets and total liabilities are increased by the present value of the capitalized leases. In its income statement, rent expense is replaced with depreciation and interest expense.

The company's total assets and total liabilities are increased by the present value of the capitalized leases. There is no effect on the income statement.

The company's total assets and total liabilities are increased by the present value of the capitalized leases. In its income statement, rent expense is replaced with interest expense.