Case Scenario:
Wal-Mart Stores, Inc. operates retail stores in various retailing formats in all 50 states in the United States. The company’s mass merchandising operations serve its customers primarily through the operation of three segments. The Wal-Mart stores segment includes its discount stores, Supercenters, and Neighborhood Markets in the United States. The SAM’s Clubs segment includes the warehouse membership clubs in the Unites States. The International segment includes all of its operations in Argentina, Brazil, Canada, China, Japan, Germany, Korea, Mexico, Puerto Rico, and the United Kingdom. The company’s subsidiary, McLane Company, Inc. provides products and distribution services to retail industry and institutional foodservice customers. Information taken from Wal-Mart’s fiscal year 2003 annual reports follows:
Commitments
The company and certain of its subsidiaries have long-term leases for stores and equipment. Rentals (including, for certain leases, amounts applicable to taxes, insurance, maintenance, other operating expenses and contingent rentals) under all operating leases were $1,091 million, $1,043 million and $893 million in 2003, 2002, and 2001, respectively. Aggregate minimum annual rentals at January 31, 2003, under noncancelable leases are as follows (in millions):
|
Fiscal Year
|
Operating Leases
|
Capital Leases
|
|
2004
|
589
|
440
|
|
2005
|
576
|
431
|
|
2006
|
560
|
428
|
|
2007
|
546
|
419
|
|
2008
|
515
|
412
|
|
Thereafter
|
5202
|
3152
|
|
Total minimum rentals
|
7988
|
A
|
|
Less estimated executory costs
|
|
57
|
|
Net minimum lease payments
|
|
B
|
|
Less imputed interest at rates ranging from 6.1% to 14.0%
|
|
C
|
|
Present value of minimum lease payments
|
|
D
|
Excerpts from Wal-Mart’s 2003 consolidated balance sheets follow:
|
($ in millions )
|
1/31/2003
|
|
Liabilities and Shareholder's Equity
|
|
|
Current Liabilites
|
|
|
Commercial paper
|
1079
|
|
Accounts Payable
|
17140
|
|
Accrued Liabilites
|
8945
|
|
Accrued Income Taxes
|
739
|
|
Long-term debt due within one year
|
4538
|
|
Total Current Liabilites
|
176
|
|
Long-term debt
|
32617
|
|
Long-term obligations under capital leases
|
16607
|
|
Deferred income taxes and other
|
3001
|
|
Total Long-term Liabilites
|
1761
|
|
|
21369
|
1. Solve for the unknowns (A,B,C, and D) in note 9.
2. Make the journal entry to account for Wal-Mart’s fiscal year 2004 capital lease payment. (Ignore allocating the executory cost portion because there is insufficient information to do so.)
3. Assume that the amount of Wal-Mart’s operating lease payment due each year after 2008 is equal and is paid at the end of each fiscal year. Assume that all of these leases terminate at the end of 2019. Using an interest rate of 8%, calculate the present value of the operating lease payments at January 31, 2003.