Consider footnote 7 from the 2011 annual report of FedEx
Consider footnote 7 from the 2011 annual report of FedEx: We utilize certain aircraft, land, facilities, retail locations, and equipment under capital and operating leases that expire at various dates through 2046..A summary of future minimum lease payments under capital leases and noncancelable operating leases with an initial or remaining term in excess of one year at May 31, 2011, is as follows (in millions):
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1. Compute the net present value of the operating lease payments as of May 31, 2011. Use a 10% implicit interest rate. For ease of computation, assume each payment is made on May 31 of the designated year (i.e., the first \$1,794 million payment is made on May 31, 2012) and that the final payment, labeled “Thereafter,” is made on May 31, 2017.
2. Suppose FedEx were to capitalize the operating leases examined in requirement 1. Show the journal entries necessary to do the following (omit explanations):
a. Capitalize the leases on June 1, 2011. Ignore any prior period adjustments, and do not break the lease obligation into current and long-term portions.
b. Record the first payment on May 31, 2012.
3. FedEx’s total assets on May 31, 2011, were \$27,385 million, and its total stockholders’ equity was \$15,220 million. Compute its total debt-to-equity ratio. Then, suppose FedEx capitalized its operating leases using the present value calculated in requirement 1. Recompute the debt-to-equity ratio. What difference does capitalizing the operating leases make to the debt-to-equity ratio?Explain.
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