Analyzing, Interpreting and Capitalizing Operating Leases Assume YUM! Brands, Inc., reports the following footnote relating to its capital and operating leases in its 2010 10-K report ($ millions). Future minimum commitments under non-cancelable leases are set forth below. At December 25, 2010, and December 26, 2009, the present value of minimum payments under capital leases was $204 million and $228 million, respectively.

Commitments ($ millions)	Capital	Operating
2011	$ 21	$ 446
2012	21	409
2013	59	417
2014	17	366
2015	17	312
Thereafter	204	2,022
	$ 339	$ 3,972

(a) Confirm that the implicit rate on YUM!'s capital leases is 7.28%.

N	Amount	IRR
0	Answer	Answer
1	Answer
2	Answer
3	Answer
4	Answer
5	Answer
6	Answer
7	Answer
8	Answer
9	Answer
10	Answer
11	Answer
12	Answer
13	Answer
14	Answer
15	Answer
16	Answer
17	Answer

Using a 7.28% discount rate and rounding the remaining lease life to three decimal places, compute the present value of YUM!'s operating leases. (When performing your calculations, round your discount factor to 5 decimal places. Round your answers to the nearest whole number.)

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

* (Use subsequent rounded answers for calculation.)

Which of the following statements best describes the adjustments we might consider to YUM!'s balance sheet and income statement from the information in part (a)?

YUM'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.

YUM'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 is added to nonoperating expense.

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

Rent expense is replaced with depreciation and interest expense is added to nonoperating expense. There is no effect on the balance sheet.

(b) YUM! reported total liabilities of $6,103 million for 2010. Would the adjustment from part (a) make a substantial difference to YUM!'s total liabilities?

Yes, YUM!'s liabilities would increase, but there would be no effect on assets.

Yes, YUM!'s assets would increase, but there would be no effect on its liabilities.

No, adjustments are not required. So, there is no effect on YUM!'s balance sheet.

Yes, YUM!'s assets and liabilities would be substantially higher following the adjustments suggested.