Reference no: EM133565019
Assignment
I. FedEx Annual Report
Locate the financial statements and related disclosure notes of FedEx Corporation for the fiscal year ended May 31, 2020. Use the information provided in the statement of cash flows to respond to the questions below.
Task
A. Is FedEx expanding its business or contracting its business, as evidenced by the investing activities? Explain your answer.
B. In 2019, did FedEx raise as much cash through financing activities as the amount needed to fund its investing activities? Explain your answer.
C. Determine the activities listed under financing activities for the most recent fiscal year. [Hint: FedEx's Statement of Changes in Common Stockholders' Investment (statement of shareholders' equity) will help you determine the nature of the stock activity.] What is the most notable financing activity reported over the most recent three years? What was the amount of cash received or paid for that activity each year? Explain your answers.
D. What are the cash payments FedEx made for interest and for income taxes in the three years reported? (Hint: See the disclosure notes.) Explain your answer.
II. Krispy Kreme's Bonus Plan Case Study
A brief description of Krispy Kreme's annual cash bonus plan for top executives follows.
The Compensation Committee chose consolidated EBITDA [earnings before interest, taxes, depreciation, and amortization] and revenue as the performance metrics for fiscal 2012, weighted at 80% and 20%, respectively. Consolidated EBITDA is defined the same way as it is defined in our secured credit facilities. The Compensation Committee assigned three levels of performance for consolidated EBITDA and for Revenue: threshold, target, and maximum.
Source: Krispy Kreme Doughnuts, Inc. 2012 Proxy, edited for brevity. Krispy Kreme was a public company before being acquired by JAB Holding Company in 2016.
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1/29/2012
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2/3/2013
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2/2/2014
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2/1/2015
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Total Assets
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$334,948
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$341,938
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$338,546
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$352,713
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Debt, Including Current Maturities
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$27,593
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$25,743
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$1,993
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$9,687
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Other Liabilities
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$58,229
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$69,763
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$71,460
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$75,240
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Total Equity
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$249,126
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$246,432
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$265,093
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$267,786
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Total Liabilities and Equity
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$334,948
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$341,938
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$338,546
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$352,713
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The disclosure further indicates that eligible recipients would receive 70%, 100%, or 140% of the portion of the target bonus for performance attributable to each performance metric for performance at the threshold, target, and maximum levels, respectively. The bonus for performance that falls between two of those levels would be prorated.
The following table provides summary balance sheet information for several years.
Task
A. One way Krispy Kreme executives could achieve the revenue target is to open new stores as quickly as possible. Explain why this might alarm shareholders.
B. Why might it be important for the bonus plan to use the same EBITDA definition used in Krispy Kreme's "secured credit facilities" (loan agreements)?
C. Describe how Krispy Kreme's executive bonus plan could encourage accounting abuses.
III. Hogan Company Case Study:
Hogan Company uses the net method of accounting for sales discounts. Hogan offers trade discounts to various groups of buyers.
On August 1, 2024, Hogan factored some accounts receivable on a without recourse basis. Hogan incurred a finance charge.
Hogan also has some notes receivable bearing an appropriate rate of interest. The principal and total interest are due at maturity. The notes were received on October 1, 2024, and mature on September 30, 2025. Hogan's operating cycle is less than one year.
Task
A. Using the net method, do sales discounts affect the amount recorded as sales revenue and accounts receivable at the time of sale? Explain your answer.
B. Using the net method, is there an effect on Hogan's sales revenues and net income when customers do not take the sales discounts? Explain your answer.
C. Do trade discounts affect the amount recorded as sales revenue and accounts receivable?Explain your answer.
D. Should Hogan decrease accounts receivable to account for the receivables factored on August 1, 2024? Why or why not?
E. Should Hogan report the face amount of the interest-bearing notes receivable and the related interest receivable for the period from October 1 through December 31 on its balance sheet as? Why or why not?
IV. Health Life Food Company Case Study
At the beginning of 2022, the Healthy Life Food Company purchased equipment for $42 million to be used in the manufacture of a new line of gourmet frozen foods. The equipment was estimated to have a 10-year service life and no residual value. The straight-line depreciation method was used to measure depreciation for 2022 and 2023.
Late in 2024, it became apparent that sales of the new frozen food line were significantly below expectations. The company decided to continue production for two more years (2025 and 2026) and then discontinue the line. At that time, the equipment will be sold for minimal scrap values.
The (head accountant) controller was asked by the company's chief executive officer (CEO) to determine the appropriate treatment of the change in service life of the equipment. The controller determined that there has been an impairment of value requiring an immediate write-down of the equipment of $12,900,000. The remaining book value would then be depreciated over the equipment's revised service life.
The CEO does not like this conclusion because of the effect it would have on 2024 income. "Looks like a simple revision in service life from 10 years to 5 years to me," the CEO concluded. "Let's go with it that way."
Task
A. What is the difference in before-tax income between the CEO's and the controller's treatment of the situation? Note: Enter your answers in whole dollars, and not in millions.Explain your answer.
B. Is GAAP more likely to require the controller's approach of impairment or the CEO's approach of change in estimate? Explain your answer.
V. Interstate Automobiles Corporation Case Study
Interstate Automobiles Corporation leased 40 vans to VIP Transport under a four-year noncancelable lease on January 1, 2024. Information concerning the lease and the vans follows:
1) Equal annual lease payments of $300,000 are due on January 1, 2024, and thereafter on December 31 each year. The first payment was made January 1, 2024. Interstate's implicit interest rate is 10% and known by VIP.
2) VIP has the option to purchase all of the vans at the end of the lease for a total of $290,000.The vans' estimated residual value is $50,000 at the end of 7 years, the estimated life of each van.
3) VIP estimates the fair value of the vans to be $1,260,000. Interstate's cost was $1,050,000.
4) VIP's incremental borrowing rate is 9%.
5) VIP will pay the maintenance fees not included in the annual lease payments of $1,000 per year. The amortization method is straight-line.
Task
A. If the vans' estimated residual value is $300,000 at the end of the lease term, how should the lease be classified by VIP? by Interstate? Explain your answer.
B. If the vans' estimated residual value is $400,000 at the end of the lease term, how should the lease be classified by VIP? by Interstate? Explain your answer.
VI. Engineered Solutions Case Study
The date is November 15, 2020. You are the new controller for Engineered Solutions. The company treasurer, Randy Patey, believes that as a result of pending legislation, the currently enacted 40% income tax rate may be decreased for 2021 to 25% and is uncertain which tax rate to apply in determining deferred taxes for 2020. Patey also is uncertain which temporary differences should be included in that determination and has solicited your help. Your accounting group provided you the following information.
Two items are relevant to the decisions. One is the $50,000 insurance premium the company pays annually for the CEO's life insurance policy, for which the company is the beneficiary. The second is that Engineered Solutions purchased a building on January 1, 2019, for $6,000,000. The building's estimated useful life is 30 years from the date of purchase, with no salvage value. Depreciation is computed using the straight-line method for financial reporting purposes and the MACRS method for tax purposes. As a result, the building's tax basis is $5,200,000 at December 31, 2020.
Task
A. What are the objectives of accounting for income taxes?
B. How do you differentiate temporary differences and permanent differences?
C. Calculate the deferred tax liability at December 31, 2020. Explain your answer.
VII. Brinks & Company Case Study
You are the newest member of the staff of Brinks & Company, a medium-size investment management firm. You are supervised by Les Kramer, an employee of two years. Les has a reputation as being technically sound but has a noticeable gap in his accounting education. Knowing you are knowledgeable about accounting issues, he requested you provide him with a synopsis of accounting for share issue costs.
"I thought the cost of issuing securities is recorded separately and expensed over time," he stated in a handwritten memo. "But I don't see that for IBR's underwriting expenses. What gives?"
He apparently was referring to a disclosure note on a page of a prospective investee's annual report, photocopied and attached to his memo. To raise funds for expansion, the company sold additional shares of its $0.10 par common stock. The following disclosure note appeared in the company's most recent annual report:
Notes to Consolidated Financial Statements
Note 10-Stock Transactions (in part)
In February and March, the Company sold 2,395,000 shares of Common Stock at $22.25 per share in a public offering. Net proceeds to the Company were approximately $50.2 million after the underwriting discount and offering expenses.
Task
A. How did IBR account for the share issue costs?
B. At what total amount did the shares sell to the public? Explain how you arrived at your answer.