Analyzing, Interpreting and Capitalizing Operating Leases Goldman Sachs' 10-K report contains the following lease footnote. This is the only information it discloses relating to its leasing activity. The firm has contractual obligations under long-term noncancelable lease agreements for office space expiring on various dates through 2069. Rent charged to operating expense was $249 million for 2015. The table below presents future minimum rental payments, net of minimum sublease rentals.

$ in millions	As of December 2015
2016	$317
2017	313
2018	301
2019	258
2020	226
2021-thereafter	1,160
Total	$2,575

(a) What lease assets and lease liabilities does Goldman Sachs report on its balance sheet? How do we know?

Goldman Sachs reports that it leases its retail locations. Because the leases represent contractual obligations, they are reported as liabilities on Goldman Sachs's balance sheet.

Under GAAP, Goldman Sachs must recognize the present value of the lease obligations as both an asset and a liability. The asset is subsequently depreciated and the liability is amortized like a mortgage obligation.

Because no capital leases are included in the Goldman Sachs footnote, we know that it only has operating leases. Because operating leases are not capitalized on the balance sheet, neither lease assets nor lease liabilities appear on the Goldman Sachs balance sheets.

Goldman Sachs reports that it leases its retail locations. Because the leases represent contractual obligations, they are reported as liabilities on Goldman Sachs's balance sheet. Goldman Sachs also reports assets relating to the real property it leases.

(b) What effect does the lease classification have on Goldman Sachs's balance sheet? Over the life of the lease, what effect does this classification have on the company's net income?

Total assets and total liabilities for Goldman Sachs are lower than if the operating leases had been capitalized. Total profit is lower as a result of this classification.

Total assets and total liabilities for Goldman Sachs are higher than if the operating leases had been capitalized. Total profit is higher as a result of this classification.

Total assets and total liabilities for Goldman Sachs are lower than if the operating leases had been capitalized. Total profit is higher as a result of this classification.

Total assets and total liabilities for Goldman Sachs are lower than if the operating leases had been capitalized. Total profit is unaffected by this classification.

(c) Using a 6% discount rate and rounding the remaining lease life to the nearest whole year, estimate the assets and liabilities that Goldman Sachs fails to report as a result of its off-balance-sheet lease financing. (Use a financial calculator or Excel to compute. Do not round until your final answers. Round each answer to the nearest whole number.)

	Present Value
Year 1
Year2
Year3
Year4
Year5
After 5
Total*

*Use subsequent rounded answers to compute total.

(d) What adjustments would we consider to Goldman Sachs's income statement corresponding to the adjustments we would make to its balance sheet in part c.

We would remove rent expense from the income statement and replace it with depreciation expense relating to the leased assets.

We would make the following adjustments to Goldman Sachs's income statement: remove rent expense, add depreciation expense, and add interest expense.

No adjustments to the income statement are required.

We would remove rent expense from the income statement.

(e) Indicate the direction (increase or decrease) of the effect that capitalizing these leases would have on the following financial items and ratios for Goldman Sachs: return on equity (ROE), net operating profit after tax (NOPAT), net operating assets (NOA), net operating profit margin (NOPM), net operating asset turnover (NOAT), and measures of financial leverage.

ROE	increasedecrease
NOPAT	increasedecrease
NOA	increasedecrease
NOPM	increasedecrease
NOAT	increasedecrease
Financial leverage	increasedecrease