Home Depot is the largest hardware and home improvement company in the world. As of February 3, 2017 (the fiscal 2016 year end) the company operated 2,256 stores. Many of these stores were leased. In its lease footnote for its financial statements, the company reported that the approximate future minimum lease payments under capital and operating leases were as follows (in millions):

Fiscal Year Capital leases Operating Leases

2017 112 856

2018 107 807

2019 99 747

2020 97 656

2021 93 582

Thereafter 797 4,560

Less imputed interest : 1,305

813

Less Current Installment: 492

33

Long-term capital lease obligation, excluding current installments: 459

The average life of operating leases was 15 years, implying that the average lease payment in years six to fifteen is $456 (million) per year. The company typically borrows at a rate of 5%.

1. From the perspective of the CEO of Home Depot, what are the pros and cons of using operating leases to finance new stores, rather than purchasing the stores outright?

2. What is the liability for Home Depot for capital leases at February 3, 2017?

3. Estimate the additional lease asset and liability for Home Depot on February 3, 2017 if accounting rules changed so that Home Depot was required to report its operating leases as capital leases. Show the entry to record the asset and liability on the books on February 3, 2017. Please record any entries related to these leases that will be made during the year ended February 3, 2018.

4. What impact will moving from an operating to a capital lease have on ROA?