Question 1

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 $245 million and $228 million, respectively.

Commitments ($ millions)	Capital	Operating
2011	$ 27	$ 422
2012	27	367
2013	65	339
2014	23	378
2015	23	280
Thereafter	276	1,964
	$ 441	$ 3,750

A) Confirm that the implicit rate on YUM!'s capital leases is 8.36%. Plug in appropriate numbers instead of "Answer" below

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 8.36% discount rate and rounding the remaining lease life to three decimal places, compute the present value of YUM!'s operating leases. (Use a financial calculator or Excel to compute. Do not round until your final answers. Round each answer to the nearest whole number.) Plug in appropriate numbers instead of "Answer" below

($ 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.)

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)?

1. Rent expense is replaced with depreciation and interest expense is added to nonoperating expense. There is no effect on the balance sheet.
2. 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.
3. 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.
4. 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.

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?

1. Yes, YUM!'s liabilities would increase, but there would be no effect on assets.
2. Yes, YUM!'s assets and liabilities would be substantially higher following the adjustments suggested.
3. Yes, YUM!'s assets would increase, but there would be no effect on its liabilities.
4. No, adjustments are not required. So, there is no effect on YUM!'s balance sheet.