On January 6, 2010, Walgreen Company, the drugstore giant, announced that it had signed a 10-year contract to outsource its accounting services with Genpact. Genpact Limited, a spin-off from General Electric in 2005, characterizes itself as a company that has achieved growth from both existing and new clients as companies across industries enacted massive layoffs to trim costs, opening demand for outsourcing companies. In the deal, 500 Walgreen employees will become Genpact employees and Genpact buys the Danville, Illinois accounting facility. Although details have not been released, about 200 IT employees will be retained and the other 300 jobs will likely be affected over the next six to eighteen months as transitions are made to improve accounting processes.
1. What types of risks do you think that Walgreen Company considered before entering into this arrangement?
2. Look at Genpact’s most recent 10-Q. (http://www.corporate-ir.net/seccapsule/seccapsule.asp?m=f&c=209334&fid=6580895&dc=)
(a) Where was Genpact incorporated?
(b) From reading the 10-Q, do you get a sense of where most of Genpact’s employees are headquartered?
3. Assume that the facility is being purchased through a noncancellable capital lease over the 10-year contract. If the facility is being purchased for the fair value of $4.5 million at a 6% implicit annual interest rate, with no residual value, an economic life of 10 years, and equal payments due at year-end, what journal entries would Genpact make for year 1?
4. Refer to question 3. What journal entries would Walgreen make regarding the facility capital lease the first year if the cost of the building is $2.8 million, collectibility of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by Walgreen?
ET Staff. (2010). “Walgreens, Genpact In 10-year Outsourcing Deal,” The Economic Times (Retrievable online at http://economictimes.indiatimes.com/infotech/ites/Walgreens-Genpact-ink-10-year-outsourcing-deal/articleshow/5422017.cms)
Moss, T. (2010). Danville Accounting Facility Sold To International Firm,” The News-Gazette.com (Retrievable online at http://www.news-gazette.com/news/business/2010/01/07/danville_accounting_facility_sold_to_international_firm)