Leases
The following note was provided by Adolph Coors Company in its 1997 annual
report:
NOTE 3:
Leases
The Company leases certain office facilities and operating equipment under cancelable and non cancelable agreements accounted for as operating leases. On December 28, 1997, the minimum aggregate rental commitment under all non cancelable leases was (in thousands): 1998, $5,403; 1999, $4,578; 2000, $3,124; 2001, $2,353; and $15,021 for years thereafter. Total rent expense was (in thousands) $13,870, $11,680, and $10,376 for years 1997, 1996, and 1995, respectively.
Required
a. Coors’ total liabilities in 1997 and 1996,respectively,were $675,515,000 and $647,049,000. Based on the information in Note 3, does it seem that the leases were a material component of these liabilities? If not, did the choice to capitalize or expense the lease payments have any material effect on Coors’ debt/asset ratios? Liquidity ratios? Asset turnover ratios?
b. Coors’ net income in 1997 and 1996, respectively, was $82,260,000 and $43,425,000. Again, based on the information in Note 3, was the rent expense a material component of net income? If so, did the choice of capitalizing or expensing the leases have a significant effect on Coors’ EPS? Return on Sales? ROE?
c. Discuss the differing effects of capitalized leases on balance sheet ratios, as compared to profitability ratios.