Module 10

M10-15

a) From these disclosures it appears that Costco has not yet adopted the new leasing standard.
How do we know this?
When Costco adopts a new standard, it must report operating leases and finance lease
obligations.
b) How would Costco determine if each of the lease contracts listed under Lease Land and/or
Building would be a finance lease or an operating lease?
To determine if it is an operating or financial lease, it is necessary that it meets some criteria
defined by the GAAP.
c) From the disclosure details, do you think the Lease Land and/or Buildings Leases are operating
or finance leases?
Operating lease

M10-16

a) How much pension expense does Stanley Black & Decker report on its 2018 income
statement?
$(4.3)
b) Explain, in general, how expected return on plan assets affects reported pension expense.
How did expected return affect Stanley Black & Decker’s 2018 pension expense?
The component of pension expense relates to the return on pension plan assets, which reduces
total pension expense. To compute this component, companies use the long-term expected rate
of return on the pension plan assets, rather than the actual return, and multiply that expected
rate by the prior year's balance in the pension plan assets account (usually the average balance
in the prior year).
The expected return on plan assets of Stanley Black & Decker was so high that the net periodic
pension (benefit) expense finished in negative numbers.
c) Explain the use of the word “expected” as it relates to pension plan assets.
It refers to a predicted value that an investor can expect from an investment.

M10-17

a) Explain the terms “service cost” and “interest cost”

Service cost: Represents the additional (future) pension benefits earned by employees during
the current year.
Interest cost: Accrues on the outstanding pension liability, just as it would with any other long-
term liability. The interest cost accrues each year, that is, interest is added to the existing
liability.
b) How do actuarial losses arise?
When companies make changes in their pension plans or make changes in actuarial assumptions
(such as the rate of wage inflation, termination and mortality rates, and the discount rate used
to compute the present value of future obligations).
 c) The fair value of YUM!’s pension asset is $755 million as of 2018. What is the funded status of
the plan, and how will this be reflected on YUM!’s balance sheet?
The funded status is $(345), which is the PBO less the fair value of the plan assets ($1290 PBO –
945 Plan assets). The negative amount indicates that the plan is underfunded as of 2012.

M10-20

a) When AT&T adopted the new standard, what were the dollar effects on total assets and on
total liabilities?
Total assets: $531,864
Total liabilities: $445,290
b) AT&T used the modified retrospective transition method of the adoption. Explain what this
means and describe the dollar impact on retained earnings.
The cumulative effect of the adoption to retained earnings was an increase of $316 reflecting to
the reclassification on deferred gains related on sale/lease back transactions.
c) Quantify in percentage terms, the size of the dollar effect of the adoption of the new standard
on AT&T’s assets, liabilities, and equity.
Liabilities: 83.72%
Equity: 16.27%
Assets: 119% and 614%