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207
CASES
CASE 7-1 OUTSOURCED SERVICES
(This case provides an opportunity to review capitalized interest.)
a.
2010
2009
Income statement interest expense
$
40,707,000
$
28,518,000
Capitalized interest
4,100,000
4,900,000
Total interest
$
44,807,000
$
33,418,000
b.
2010
2009
2008
Interest expense on income statement
$
40,707,000
$
28,518,000
$
30,202,000
c.
2010
2009
Interest added to the cost of
property, plant, and equipment
$
4,100,000
$
4,900,000
the fixed asset is depreciated.
e. Since the interest is capitalized, the interest does not appear on the income
statement until the asset is depreciated.
f.
Times Interest Earned
=
Recurring Earnings, Excluding Interest Expense, Tax
Expense, Equity Earnings, and Noncontrolling Interest
Interest Expense, Including Capitalized Interest
2010
2009
$98,104,000 + $40,707,000
$105,031,000 + $28,518,000
$44,807,000
$33,418,000
3.10 times
4.00 times
Material decrease and may be relatively low.
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CASE 7-2 GLOBAL PROVIDER
a. 1. $777,739,000
Capital leases are immaterial in relation to total property and equipment.
b.
Capital lease obligations
(A)
$
1,379,000
Debt
(B)
$
1,524,753,000
(A) ÷ (B)
0.09%
Capital lease obligations are immaterial in relation to debt.
3.
Operating leases
(B)
$
239,600,000
Capital
(A)
$
1,379,000
(A) ÷ (B)
0.58%
Operating leases are very material in relation to capital leases.
209
CASE 7-3 SAVING PEOPLE MONEY
(This case provides an opportunity to review an amortization vs. payments on leases)
a. The lease is a type of intangible. It is described as amortization if it is a periodic
reduction of the cost of an intangible asset.
b.
(In millions)
Assets
2011
2010
Property under capital lease:
Property under capital lease
$
5,905
$
5,669
Less accumulated amortization
(3,125)
(2,906)
$
2,780
$
2,763
Liabilities
Current liabilities:
Obligations under capital leases due within one year
$
336
$
346
Long-term liabilities:
Long-term obligations under capital leases
3,150
3,170
Total related to capital leases
$
3,486
$
3,516
The asset is being amortized while the liability goes down based upon payments.
CASE 7-4 LOCKOUT
(This case provides an opportunity to review an interesting commitments and
contingencies note of the Boston Celtics.)
analysis.
To quote from the note:
“Although the ultimate outcome of this matter cannot be determined at this time, any
In the long run, the lockout may be positive as aggregate salaries may be reduced.
210
CASE 7-5 SAFE-MANY EMPLOYERS
(This case provides an opportunity to review a multi-employer pension plan.)
a.
2010
2009
2008
Contributions (a)
$292,300,000
$278,100,000
$286,900,000
2010.
b. “These multi-employer retirement plans are generally defined benefit plans and are
c. They have agreed with the unions to participate in various multi-employer
retirement plans. They have no control over the payments.
CASE 7-6 SAFE-OTHER THAN PENSIONS
(This case provides an opportunity to review a defined benefit plans and other post
retirement benefits)
a. 1.
Pension
Other post
retirement benefit
(In millions)
2010
2009
2010
2009
Projected benefit obligation
$
2,257.2
$
2,095.5
$
132.8
$
121.7
2.
Pension
Other post
retirement benefit
(In millions)
2010
2009
2010
2009
Fair value of plan assets
$
1,652.2
$
1,572.1
$
0
$
0
3.
Pension
Other post
retirement benefit
(In millions)
211
2010
2009
2010
2009
Funded status
$
(605.0)
$
(523.4)
$
(132.8)
$
(121.7)
4. The post retirement benefits are not funded.
5. Yes. “Information for Safeway’s pension plans, all of which have an
6.
Pension
Other post
retirement benefit
(In millions)
2010
2009
2010
2009
Projected benefit
obligation
(A) $
2,257.2
(B) $
2,095.5
(A) $
132.8
(B) $
121.7
(A) ÷ (B)
7.72%
9.12%
Both the pension and other post retirement benefits had substantial increases
in projected benefit obligation in 2010.
Pension
Other post
retirement benefit
(In millions)
2010
2009
2010
2009
Funded status
(A) $
(605.0)
(B) $
(523.4)
(A) $
(132.8)
(B) $
(121.7)
(A) ÷ (B)
15.6%
9.12%
CASE 7-7 SPECIALTY COFFEE
additional liability.
212
d.
2010
2009
2008
Company contributions (A)
$23,500,000
$19,700,000
$25,300,000
Net revenues (B)
$10,707,400,000
$9,774,600,000
$10,383,000,000
(A) ÷ (B)
0.22%
0.20%
0.24%
CASE 7-8 TRANSACTION PRINTERS
(This case provides an opportunity to review a defined contribution plan.)
a. Defined contribution plan
b.
2010
2009
2008
Matching contributions (A)
$223,000
$237,000
$244,000
Net income (B)
$3,904,000
$2,140,000
$1,444,000
(A) ÷ (B)
5.71%
11.07%
16.9%
Material in 2009 and 2008, declining materially in 2010 as income increased.
2010
2009
2008
Matching contributions (A)
$223,000
$237,000
$244,000
Net sales (B)
$63,194,000
$58,346,000
$62,207,000
(A) ÷ (B)
0.35%
0.41%
0.39%
c. Reasonable control of pension expenses. “We match employees’ contributions at a
CASE 7-9 SIMULATION SOLUTIONS
a. $50 million loss as of January 1, 2011
b. There were no collateral balance requirements at January 1, 2011
213
master netting and reciprocal collateralization agreements.
d. Management believes concentrations of credit risk with respect to accounts
receivable is limited due to the generally high quality of the Company’s major
customers.
CASE 7-10 SPECIALTY RETAILER – DEBT VIEW
stores.)
a. Disclosure not adequate to compute for Abercrombie & Fitch, nor for GAP. A
material improvement for Limited Brands and the coverage appears to be good for
Limited Brands.
Limited Brands.
c. Times interest earned only relates to interest coverage. Fixed charge coverage
included interest portion of rentals.
e. Considering the debt ratio, Abercrombie & Fitch is in the best position followed by
the GAP and then Limited Brands.
f. The debt to tangible net worth has intangible assets subtracted from shareholders’
equity.
(This case provides an opportunity to view the debt position of several restaurant
companies.)
a. Yum Brands, Inc. presented “interest expense, net,” therefore the disclosure is not
coverage.
214
b. Yum Brands, Inc. presented “interest expense, net” therefore, the disclosure is not
Bread.
relates to interest and interest portion of rentals.
e. The debt ratio is materially better for Panera Bread than for either Yum Brands, Inc.
equity.
