Deferred Expenses and Long-Lived Assets & Interest Expense and Creditor-Related Liabilities » Exercises
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Long-term Assets, Long-
Consolidated Statements of Cash Flows
Three years ended December 25,1999
(in millions -except per share amounts)
1999
1998
Cash and cash equivalents, beginning of year
$2,038
$4,102
Cash flows provided by (used for) operations:
Net income
7,314
6,068
Adjustments to reconcile net income to net cash provided by (used for) operations
Depreciation
3,186
2,807
Amortization of goodwill and other acquisition-related intangibles
411
56
Purchased in-process research and development
392
165
Gains on sales of marketable strategic equity securities
(883)
(185)
Net loss on retirements of property, plant, and equipment
193
282
Deferred taxes
(219)
77
Change in assets and liabilities
Accounts receivable
153
(38)
Inventories
169
167
Accounts payable
79
(180)
Accrued compensation and benefits
127
17
Income taxes payable
726
(211)
Tax benefit from employee stock options
506
415
Other assets and liabilities
(819)
(378)
Total adjustments
4,021
2,994
Net cash provided by operating activities
11,335
9,062
Cash flows provided by (used for) investing activities:
Additions to property, plant, and equipment
(3,403)
(3,557)
Acquisitions, net of cash received
(2,979)
(906)
Purchases of available-for-sale investments
(7,055)
(10,925)
Sales of available for sale investments
831
201
Maturities and other changes in available-for-sale investments
7,156
8,681
Net cash (used for) investing activities
(5,450)
(6,506)
1997
$4,165
6,945
2,192
----(106)
130
6
285
(404)
438
140
179
224
(127)
2,957
9,902
®
(4,501)
--(9,224)
153
6,713
(6,859)
term Debt, and Leases
C H A P T E R
P R I N T
C O N T E N T S
Assigned Exercise Materials
Note:
Excel templates and exercise solutions are only found on-line. Go to
your Course Map syllabus or the URL above to locate exercise web
pages.
You are free to share and customize this work, as long as you attribute G. Peter & Carolyn R. Wilson and respect the Creative
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Deferred Expenses and Long-lived Assets » What’s Behind the numbers » Exercises
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E X E R C I S E S
la.wbn.020 Recording entries using company disclosures and determining their
financial-statement effects (HP)
This exercise asks you to record entries based on HP’s disclosures and then determine
how these entries affected HP’s financial statements. The entries should be recorded using
the accounts on page 5. HP’s financial statements and excerpts from its 2012 10K are on
pages 6-10.
Part I: Record Entries
Record Keeping
This exercise helps
you learn how to
do record keeping
and reporting.
Required
(a) Record a journal entry that recognizes HP’s cash purchases of PP&E for the year
ended October 31, 2012. Write your entry in the space below using the accounts on
page 5.
HP's 2012 cash purchases of PP&E
Debit
Credit
Search
This exercise helps
you learn how to
search for
information.
Usage
(b) Record a journal entry that recognizes HP’s retirements and sales of PP&E for the
year ended October 31, 2012. Write your entry in the space below using the accounts
on page 5.
Hint: See the excerpt for Note 4. Also, assume all sales were for cash.
HP's 2012 sales and retirements of PP&E
Debit
Credit
(c) Record a journal entry that recognizes HP’s amortization of purchased intangible
assets for the year ended October 31, 2012. Write your entry in the space below
using the accounts on page 5.
Assume none of the amortization was charged to production.
HP's 2012 amortization of purchased intangibles
Debit
Credit
You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons
Attribution-Noncommercial-Share Alike United States license. © 1991–2013 NavAcc LLC.
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Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 2
This exercise helps
you learn how to
use accounting
information.
2
NAVIGATING ACCOUNTING®
(d) Record a journal entry that recognizes HP’s goodwill impairments for the year
ended October 31, 2012. Write your entry in the space below using the accounts on
page 5. Hint: See the excerpt for Note 7.
HP's 2012 impairments of goodwill
Debit
Credit
(e) Record a journal entry that recognizes HP’s purchased intangibles impairments
for the year ended October 31, 2012. Write your entry in the space below using the
accounts on page 5. Hint: See the excerpt for Note 7 and financial statements.
HP's 2012 impairments of purchased intangibles
Debit
Credit
Part II: Financial-Statement Effects of Entries
Required
For the entries you recorded in Part I, complete the related table identifying the HP
financial statement line items that would have been directly affected (and the direction of
the effects) during the year ended October 31, 2012.
Guidance:
(1) Determine the appropriate line item(s) affected using HP’s financial statements
on pages 6-9 For example, write “cash and cash equivalents” rather than “cash”
because this is on HP’s balance sheet.
(2) Include line item(s) directly affected, including the effect(s) of closing entries for
events affecting income. Ignore taxes.
(3) Don’t include totals or sub-totals indirectly affected by the entry. For example,
don’t report “net income” on the income statement. However, net income is
NOT a total on the statement of shareholders’ equity.
(4) Three or four lines were included below for each statement, but you may need
none or more than one line. Write “NONE” if no line item is effected on the
statement.
(5) Indicate if the effect(s) of the entries associated with the event increased or
decreased the line item. Put an X in the appropriate column if the above event
increases or decreases that line item. Be sure to mark only one box in each
statement’s row. NOTE: If a reported negative number changes from -2 to -3, it
decreases; if it changes from - 2 to - 1, it increases.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 3
3
EXERCISE
(f) PP&E cash purchases
HP's 2012 cash purchases of PP&E
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF INCOME
Increases
Decreases
Line Items
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
STATEMENT OF CASH FLOWS
Line Items
Line Items
Increases
Decreases
Increases
Decreases
Increases
Decreases
Increases
Decreases
(g) PP&E sales and retirements
HP's 2012 sales and retirements of PP&E
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Line Items
Increases
Decreases
Line Items
Increases
Decreases
STATEMENT OF CASH FLOWS
Line Items
Increases
Decreases
(h) Purchased intangibles amortization
HP's 2012 amortization of purchased intangibles
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF INCOME
Increases
Decreases
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Line Items
Increases
Decreases
Line Items
Increases
Decreases
STATEMENT OF CASH FLOWS
Line Items
Increases
Decreases
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 4
4
NAVIGATING ACCOUNTING®
(i) Goodwill impairments
HP's 2012 impairments of goodwill
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF INCOME
Increases
Decreases
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Line Items
Increases
Decreases
Line Items
Increases
Decreases
STATEMENT OF CASH FLOWS
Line Items
Increases
Decreases
(j) Purchased intangibles amortization
HP's 2012 impairments of purchased intangibles
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF INCOME
Increases
Decreases
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Line Items
Increases
Decreases
Line Items
Increases
Decreases
STATEMENT OF CASH FLOWS
Line Items
Increases
Decreases
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 5
5
EXERCISE
CHART OF ACCOUNTS
ASSETS
Current
AR
C
Inven
PrEx
Accounts receivable
Accounts receivable, gross
ARG
Allowance for bad debts
Allbd
Cash and cash equivalents
Inventories
Minv
Materials inventories
WIP
Work in process
FGI
Finished goods inventories
SIdr
Segregated inventories: deferred revenue
Prepaid expenses
Non-current
PPE
Property, plant, and equipment, net
PPEhc
PP&E (historical cost)
AcDep
Accumulated depreciation
PPEimp
Accumlated PP&E impairments
Intan
Purchased intangibles (other than goodwil)
Gdw
Inthc
AcAmt
Purchased intangibles (historical cost)
Accumulated purchased intangibles amortization
Intimp
Accumlated purchased intangibles impairments
Goodwill
Gdwhc
Goodwill historical cost
Intimp
Accumulated goodwill impairments
LIABILITIES
Current
AcrL
DivP
Drev
Accrued liabilities
Dividend payable
Deferred revenue
Non-current
LTD
Long-term debt
OWNERS' EQUITY
Permanent
RE
SCap
Retained earnings
Share capital
Net income
AmtEx
CGS
DepEx
G/L
Amortization expense
Cost of goods sold
Depreciation expense
Gain/loss
PPEGL
Gain/Loss on PP&E disposals
Imp
Impairments
Intimp
Purchased intangibles impairments
Gdwimp Goodwill impairments
IncS
Income summary
MSGA Miscellaneous SG&A expense
Rev
Revenues, net
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 6
6
NAVIGATING ACCOUNTING®
HEWLETT PACKARD COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
October 31
2012
2011
In millions, except
par value
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
Financing receivables
Inventory
Other current assets
Total current assets
Property, plant and equipment
Long-term financing receivables and other assets
Goodwill
Purchased intangible assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings
Accounts payable
Employee compensation and benefits
Taxes on earnings
Deferred revenue
Accrued restructuring
Other accrued liabilities
Total current liabilities
Long-term debt
Other liabilities
Commitments and contingencies
Stockholders' equity:
HP stockholders' equity
Preferred stock, $0.01 par value (300 shares authorized; none issued)
Common stock, $0.01 par value (9,600 shares authorized; 1,963 and
1,991 shares issued and outstanding, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total HP stockholders' equity
Non-controlling interests
Total stockholders' equity
Total liabilities and stockholders' equity
$11,301
16,407
3,252
6,317
13,360
50,637
11,954
10,593
31,069
4,515
$108,768
$8,043
18,224
3,162
7,490
14,102
51,021
12,292
10,755
44,551
10,898
$129,517
$6,647
13,350
4,058
846
7,494
771
13,500
46,666
21,789
17,480
$8,083
14,750
3,999
1,048
7,449
654
14,459
50,442
22,551
17,520
20
20
6,454
21,521
(5,559)
22,436
397
22,833
$108,768
6,837
35,266
(3,498)
38,625
379
39,004
$129,517
Hewlett Packard 2012 10K, sec.gov
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 7
7
EXERCISE
HEWLETT PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
For the fiscal years ended October 31
2012
2011
2010
In millions, except per share amounts
Net revenue:
Products
$77,887
$84,757
$84,799
Services
42,008
42,039
40,816
462
449
418
120,357
127,245
126,033
Cost of products
59,468
65,167
65,064
Cost of services
32,600
31,945
30,486
Financing income
Total net revenue
Costs and expenses:
Financing interest
Research and development
Selling, general and administrative
Amortization of purchased intangible assets
Impairment of goodwill and purchased intangible assets
Restructuring charges
Acquisition-related charges
Total operating expenses
(Loss) earnings from operations
Interest and other, net
317
306
302
3,399
3,254
2,959
13,500
13,577
12,822
1,784
1,607
1,484
18,035
885
2,266
645
1,144
45
182
293
131,414
117,568
114,554
9,677
11,479
(11,057)
(876)
(Loss) earnings before taxes
(695)
(11,933)
(505)
8,982
10,974
(1,908)
(2,213)
($12,650)
$7,074
$8,761
Basic
($6.41)
$3.38
$3.78
Diluted
($6.41)
$3.32
$3.69
Provision for taxes
(717)
Net (loss) earnings
Net (loss) earnings per share:
Weighted-average shares used to compute net (loss) earnings per share:
Basic
1,974
2,094
2,319
Diluted
1,974
2,128
2,372
Hewlett Packard 2012 10K, sec.gov
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 8
8
NAVIGATING ACCOUNTING®
HEWLETT PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Common Stock
Number of
Shares
Par
Value
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Total HP
Stockholders'
Equity
Noncontrolling
Interests
($3,247)
$40,517
$247
Total
In millions, except number of shares in thousands
Balance October 31, 2009
2,364,809
$24
$13,804
Net earnings
Other comprehensive loss
$29,936
8,761
(590)
Comprehensive income
Issuance of common stock in connection
80,335
1
2,606
(241,246)
(3)
(5,809)
$40,764
8,761
(590)
8,761
(590)
8,171
8,171
2,607
2,607
(11,071)
(11,071)
with employee stock plans and other
Repurchases of common stock
Net excess tax benefits from employee stock plans
(5,259)
300
Cash dividends declared
(743)
Stock-based compensation expense
Changes in non-controlling interest
668
Balance October 31, 2010
2,203,898
$22
$11,569
Net earnings
Other comprehensive income
$32,695
($3,837)
339
Comprehensive income
45,461
1
(258,853)
(3)
300
(743)
(743)
668
7,074
Issuance of common stock in connection
300
751
$40,449
85
668
85
$332
$40,781
7,074
339
7,074
339
7,413
7,413
752
752
with employee stock plans and other
Repurchases of common stock
Net excess tax benefits from employee stock plans
(6,296)
(3,669)
(9,968)
128
Cash dividends declared
(834)
Stock-based compensation expense
Changes in non-controlling interest
685
Balance October 31, 2011
1,990,506
$20
$6,837
Net loss
Other comprehensive loss
$35,266
682
(834)
47
685
47
$379
$39,004
($3,498)
$38,625
(2,061)
(12,650)
(2,061)
(12,650)
(2,061)
(14,711)
(14,711)
Comprehensive loss
39,068
128
(834)
685
(12,650)
Issuance of common stock in connection
(9,968)
128
1
683
683
with employee stock plans and other
Repurchases of common stock
(66,736)
(1,525)
Net excess tax benefits from employee stock plans
Cash dividends declared
(1,626)
(995)
Stock-based compensation expense
Changes in non-controlling interest
Balance October 31, 2012
(101)
(175)
635
1,962,838
$20
$6,454
(1,626)
(175)
(175)
(995)
(995)
635
$21,521
($5,559)
$22,436
18
635
18
$397
$22,833
Hewlett Packard 2012 10K, sec.gov
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 9
9
EXERCISE
HEWLETT PACKARD COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the fiscal years ended October 31
2012
2011
2010
In millions
Cash flows from operating activities:
Net (loss) earnings
$
(12,650)
$
7,074
$
8,761
Adjustments to reconcile net (loss) earnings
to net cash provided by operating activities:
Depreciation and amortization
Impairment of goodwill and purchased intangible assets
5,095
4,984
4,820
18,035
885
Stock-based compensation expense
635
685
668
Provision for doubtful accounts accounts and financing receivables
142
81
156
Provision for inventory
277
217
189
Restructuring charges
2,266
645
1,144
(711)
166
197
Excess tax benefit from stock-based compensation
(12)
(163)
(294)
Other, net
265
(46)
169
Deferred taxes on earnings
Changes in operating assets and liabilities:
Accounts and financing receivables
Inventory
Accounts payable
Taxes on earnings
Restructuring
Other assets and liabilities
Net cash provided by operating activities
1,269
(227)
(2,398)
890
(1,252)
(270)
(1,414)
275
(698)
(320)
610
723
(840)
(1,002)
(2,356)
(293)
(1,334)
89
10,571
12,639
11,922
(3,706)
(4,539)
(4,133)
Cash flows from investing activities:
Investment in property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchases of available-for-sale securities and other investments
617
999
602
(972)
(96)
(51)
Maturities and sales of available-for-sale securities and other investments
662
68
200
Payments in connection with business acquisitions, net of cash acquired
(141)
Proceeds from business divestiture, net
(10,480)
87
Net cash used in investing activities
(8,102)
89
(3,453)
125
(13,959)
(11,359)
Cash flows from financing activities:
(Payments) issuance of commercial paper and notes payable, net
(2,775)
(1,270)
4,156
Issuance of debt
5,154
11,942
3,156
Payment of debt
(4,333)
(2,336)
(1,323)
Issuance of common stock under employee stock plans
716
Repurchase of common stock
896
(1,619)
Excess tax benefit from stock-based compensation
12
Cash dividends paid
Net cash used in financing activities
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
(11,042)
163
294
(844)
(771)
(3,860)
(1,566)
(2,913)
3,258
(2,886)
(2,350)
(1,015)
Increase (decrease) in cash and cash equivalents
2,617
(10,117)
8,043
11,301
$
10,929
8,043
$
13,279
10,929
Hewlett Packard 2012 10K, sec.gov
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 10
10
NAVIGATING ACCOUNTING®
Excerpts from HP’s 2012 10K
■
Note 4: Balance Sheet Details (Continued)
Property, Plant, and Equipment
2012
2011
In millions
Land
$636
Buildings and leasehold improvements
$687
8,744
8,620
16,503
16,155
$25,883
$25,462
Machinery and equipment
Accuulated depreciation
(13,929)
(13,170)
$11,954
$12,292
Depreciation expense was approximately $3.3 billion in fiscal 2012, $3.4 billion in fiscal 2011 and $3.3
billion in fiscal 2010. For the twelve months ended October 31, 2012, additions to gross property, plant and
equipment of $3.7 billion were partially offset by sales and retirements totaling $2.7 billion. Accumulated
depreciation associated with the assets sold and retired was $2.2 billion.
Property, Plant, and Equipment section of Note 4, page 102, HP’s 2012 10-K.
■
Note 7: Goodwill and Purchased Intangible Assets
Goodwill allocated to HP’s reportable segments as of October 31, 2012 and 2011 and changes in the carrying
amount of goodwill during the fiscal years ended October 31, 2012 and 2011 are as follows:
Net balance at October 31, 2010
Personal
Systems
Printing
Services
Enterprise
Servers,
Storage
and
Networking
$2,500
$2,456
$16,967
$6,610
16
66
(1)
247
Goodwill acquired during the period
Goodwill adjustments/reclassifications
(2)
Software
HP
Financial
Services
Corporate
Investments
$7,545
$144
$2,261
In millions
6,786
1,460
(1,423)
($813)
Net balance at October 31, 2011
$2,498
$2,471
$17,280
$8,070
$25
(308)
($7,961)
$2,498
$2,487
13
($813)
$44,551
16
(40)
Impairment loss
$144
16
Goodwill adjustments/reclassifications
Net balance at October 31, 2012
$14,063
$38,483
6,868
(268)
Impairment loss
Goodwill acquired during the period
Total
$9,279
580
232
($5,744)
$7,762
$8,899
$144
($25)
($13,730)
$0
$31,069
2012 2012
10K, sec.gov
Excerpt from Note Hewlett
7, pagePackard
104, HP’s
10-K.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 11
Interest Expense and Creditor-Related Liabilities » What’s Behind the numbers » Exercises
www.navigatingaccounting.com
E X E R C I S E S
db.wbn.basics.020 Recording entries using company disclosures and determining
their financial-statement effects (Darden Restaurants)
Parts I and II of this exercise ask you to record entries based on Darden Restaurants’ disclosures and then determine how these entries affected Darden’s financial statements. The
entries should be recorded using the accounts on page 9. Darden’s financial statements
and footnote excerpts from its fiscal 2012 10K are on pages 10-15. Part III of this exercise
examines how Darden’s entries and ratios would have changed if the company had capitalized its operating leases at the end of fiscal 2012.
Record Keeping
This exercise helps
you learn how to
do record keeping
and reporting.
Part I: Record Entries
Required
Search
(a) Record a journal entry that recognizes Darden’s long-term debt issuance for the
year ended May 27, 2012, assuming Darden follows US GAAP. Write your entry in
the space below using the accounts on page 9. Assume transfers to the current portion
are recorded in another entry.
This exercise helps
you learn how to
search for
information.
Darden Restaurants' 2012 US GAAP entry to issue long-term debt
Debit
Credit
(b) Record the journal entry Darden would have recorded as long-term debt issuance
for the year ended May 27, 2012 if Darden had been following IFRS. Write your
entry in the space below using the accounts on page 9. Assume transfers to the current
portion are recorded in another entry.
Darden Restaurants' 2012 IFRS entry to issue long-term debt
Debit
Credit
(c) Record a journal entry that recognizes Darden’s interest capitalization for the year
ended May 27, 2012. Assume the interest is paid in a subsequent entry. Write your
entry in the space below using the accounts on page 9.
Capitalized interest is a portion of the interest associated with debt that is attributed
to construction. Assume Darden’s capitalized interest for 2012 was part of the cost to
build new restaurants. Hint: See note 15.
Darden Restaurants' 2012 interest capitalization
Debit
Credit
You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons
Attribution-Noncommercial-Share Alike United States license. © 1991–2013 NavAcc LLC.
www.navigatingaccounting.com
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 12
Usage
This exercise helps
you learn how to
use accounting
information.
2
NAVIGATING ACCOUNTING®
(d) Record a journal entry that recognizes Darden’s transfers of long-term debt and
capital lease obligations from non-current liabilities to current liabilities during
the year ended May 27, 2012. Write your entry in the space below using the accounts
on page 9.
For the purpose of this question, assume the year-end balances in the related current
accounts are the amounts that were recorded into them during the year. Hint: See
Notes 9 and 14.
Darden Restaurants' 2012 reclassifications of LTD and CLO
Debit
Credit
(e) Record a journal entry that recognizes Darden ‘s rental expense associated with
operating leases for the year ended May 27, 2012. Write your entry in the space
below using the accounts on page 9.
Assume the expense is paid in a subsequent entry. Hint: See Note 14.
Darden Restaurants' 2012 rental expense for operating leases
Debit
Credit
Part II: Financial-Statement Effects of Entries
Required
For the entries you recorded in Part I, complete the related table identifying the Darden’s
financial statement line items that would have been directly affected (and the direction of
the effects) during the year ended May 27, 2012.
Guidance:
(1) Determine the appropriate line item(s) affected using Darden Restaurants’ financial statements on pages 10-13 For example, write “cash and cash equivalents”
rather than “cash” because this is on Darden Restaurants’ balance sheet.
(2) Include line item(s) directly affected, including the effect(s) of closing entries for
events affecting income. Ignore taxes.
(3) Don’t include totals or sub-totals indirectly affected by the entry. For example,
don’t report “net earnings” on the income statement. However, net earnings is
NOT a total on the statement of changes in stockholders’ equity.
(4) Three or four lines were included below for each statement, but you may need
none or more than one line. Write “NONE” if no line item is effected on the
statement.
(5) Indicate if the effect(s) of the entries associated with the event increased or
decreased the line item. Put an X in the appropriate column if the above event
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 13
3
EXERCISE
increases or decreases that line item. Be sure to mark only one box in each statement’s row. NOTE: If a
reported negative number changes from -2 to -3, it decreases; if it changes from - 2 to - 1, it increases.
(f) Long-term debt issuance under US GAAP
Darden Restaurants' 2012 US GAAP entry to issue long-term debt
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF EARNINGS
Increases
Decreases
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Line Items
Increases
Decreases
Line Items
Increases
Decreases
STATEMENT OF CASH FLOWS
Line Items
Increases
Decreases
(g) Long-term debt issuance under IFRS
Darden Restaurants' 2012 IFRS entry to issue long-term debt
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF EARNINGS
Increases
Decreases
Increases
Decreases
Increases
Decreases
Increases
Decreases
STATEMENT OF CASH FLOWS
Line Items
Increases
Decreases
Line Items
Increases
Decreases
STATEMENT OF CASH FLOWS
Line Items
Increases
Decreases
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Line Items
Line Items
(h) Capitalize interest
Darden Restaurants' 2012 interest capitalization
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF EARNINGS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Line Items
Increases
Decreases
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 14
4
NAVIGATING ACCOUNTING®
(i) Reclassify long-term debt and capital lease obligations
Darden Restaurants' 2012 reclassifications of LTD and CLO
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF EARNINGS
Increases
Decreases
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Line Items
Increases
Decreases
Line Items
Increases
Decreases
STATEMENT OF CASH FLOWS
Line Items
Increases
Decreases
(j) Accrue rental expense on operating leases
Darden Restaurants' 2012 rental expense for operating leases
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF EARNINGS
Increases
Decreases
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Line Items
Increases
Decreases
Line Items
Increases
Decreases
STATEMENT OF CASH FLOWS
Line Items
Increases
Decreases
Part III: Capitalizing Operating Leases as an Outsider
Introduction
When analyzing companies, analysts often adjust reported financial statements so they better reflect underlying
business activities or facilitate cross-company comparisons (when companies account for similar events differently). One of the most common adjustments is to use footnote information to capitalize companies’ operating
leases. For example, they create fictitious balance sheets that recognize the assets and liabilities that would have
been recognized if companies had classified their operating leases as capital leases. Some analysts also create fictitious income statements along the lines discussed later for Darden Restaurants.
As outsiders, analysts can’t create (from footnote information) the same financial statements insiders would have
created if they had capitalized the operating leases. The extent to which analysts’ statements approximate those
an insider would have created hinges on two assumptions outsiders must make to capitalize a company’s operating leases. We will explain these assumptions using information in Darden’s Note 14 (at the top of next page):
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 15
5
EXERCISE
(in millions)
Fiscal Year
2013
2014
2015
2016
2017
Thereafter
Total future lease commitments
Less imputed interest (at 6.5%)
Present value of future lease commitments
Less current maturities
Obligations under capital leases, net of current maturities
Capital
$5.2
5.4
5.5
5.6
5.8
67.2
94.7
(38.7)
56.0
(1.6)
$54.4
Operating
$151.5
142.0
130.0
114.5
96.3
302.5
$936.8
Darden Restaurants' 2012 10-K, sec.gov
For Darden, an analyst’s goal (when capitalizing operating leases) is to estimate the present value of the future
lease payments reported in the “Operating” column (at the far right). The total future value of these leases is
$936.8. As indicated in the “Capital” column, Darden has already capitalized leases that have a total future value
of $94.7 and present value of $56.
The two assumptions outsiders must make to compute the operating lease payments’ present value are:
(i) Outsiders must assume a pattern for how the $302.50 of “thereafter” operating lease cash flows are
spread over years after 2017. There is no right way to do this and outsiders should assess the sensitivity
of their analyses to this assumption by repeating the analyses with alternative patterns. For the computations below, we assume the payments for 2018 and beyond are the same as the $96.3 payment for 2017
(until the $302.5 is used up, when the final payment is smaller).
(ii) Outsiders must assume a discount rate that approximates the rate Darden would incur to finance
comparable assets with debt. We have assumed a 4% rate below, which is slightly lower than the 4.5%
rate Darden incurred on the unsecured debt it issued during fiscal 2012, for a similar duration to the
estimated remaining term of the operating leases. The lease obligations are secured by the leased assets,
so the discount rate should be less than 4%. Analysts can assess the sensitivity of their analyses to this
assumption by repeating the analyses with alternative rates.
Based on these assumptions, here is how we derived our $798.8 estimate of the present value of Darden’s operating leases at fiscal 2012 year-end:
Capitalizing operating leases: present value of future operating lease payments
Discount rate: 4%
Reported by Darden
Year
2013
2014
2015
2016
2017
Thereafter
Operating lease
payments
$151.5
142.0
130.0
114.5
96.3
302.5
Present value of estimated future lease payements, discounted at 4%, using
2017 payment after 2017, until thereafter cash flows used up
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
Operating lease
payments
$151.5
142.0
130.0
114.5
96.3
96.3
96.3
96.3
13.6
Present value of 1,
Present value of
discounted at 4%
each payment
0.9615
$145.7
0.9246
131.3
0.8890
115.6
0.8548
97.9
0.8219
79.1
0.7903
76.1
0.7599
73.2
0.7307
70.4
0.7026
9.6
Total
$798.8
Alternatively, using Excel formula
$798.8
Darden’s fiscal 2012 year-end balance sheet can now be adjusted to the one the company would have reported
if it had capitalized its operating leases. You will record a related fictitious entry later, along with another entry
Darden would have recorded in fiscal 2013 if it had capitalized its operating leases at fiscal 2012 year-end. To
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 16
6
NAVIGATING ACCOUNTING®
this end, you will need the following estimated amortization schedules for the assets and liabilities Darden would
have reported if it had capitalized its operating leases at fiscal 2012 year-end.
Capitalizing operating leases: liability and asset amortization schedules
Capital lease liability amortization
Year
Beginning
Interest expense
long-term
accrued during
capital lease
current year
obligation
Principal paid
Ending longPrincipal paid
last day of
term capital
last day of
next year
lease
current year,
(transferred to
obligation
except 2012
current)
Payment
assumed last
day of the
current year
Capital lease
asset
amortization,
assuming
usage
proportional
to payments
2013
$798.76
$31.95
$151.50
$119.55
$114.83
$564.38
$129.18
2014
$679.21
$27.17
$142.00
$114.83
$107.42
$456.96
$121.08
2015
$564.38
$22.58
$130.00
$107.42
$96.22
$360.74
$110.84
2016
$456.96
$18.28
$114.50
$96.22
$81.87
$278.87
$97.63
2017
$360.74
$14.43
$96.30
$81.87
$85.15
$193.72
$82.11
2018
$278.87
$11.15
$96.30
$85.15
$88.55
$105.17
$82.11
2019
$193.72
$7.75
$96.30
$88.55
$92.09
$13.08
$82.11
2020
$105.17
$4.21
$96.30
$92.09
$13.08
$0.00
$82.11
2021
$13.08
$0.52
$13.60
$13.08
$0.00
$0.00
$11.60
Required
(k) Record the (fictitious) journal entry Darden would have recorded at fiscal 2012 year-end if the company
had capitalized its operating leases on that date. Write your entry in the space below using the accounts on
page 9. Assume the current portion is recognized in this entry.
Capitalizing operating leases: recognizing capital lease, 2012 year-end
Debit
Credit
(l) For the entry you recorded in (k), complete the table below identifying the Darden’s financial statement line
items that would have been directly affected (and the direction of the effects) for fiscal 2012.
Capitalizing operating leases: recognizing capital lease, 2012 year-end
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF EARNINGS
Increases
Decreases
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Line Items
Increases
Decreases
Line Items
Increases
Decreases
STATEMENT OF CASH FLOWS
Line Items
Increases
Decreases
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 17
7
EXERCISE
(m)Complete the table below to assess how the ratios therein would have changed if Darden had capitalized its
operating leases at the end of fiscal 2012:
Capitalizing operating leases: ratio comparisons for 2012
Reported 2012 numbers
Year-end total Year-end total
liabilities
assets
$4,102.2
Year-end
current assets
$757.6
Net income
$475.5
Net revenues
$7,998.7
$5,944.2
Year-end
current
liabilities
Year-end
financial
leverage
Average
owners' equity
$1,889.1
Average
assets
Ratio
Ratio
increased decreased
Ratio
same
Year-end
current assets
Year-end
current
liabilities
Year-end
current ratio
Ratio
Ratio
increased decreased
Ratio
same
Net income
Average
owners' equity
ROE
Ratio
Ratio
increased decreased
Ratio
same
Net revenues
Average
assets
Asset
turnover
Ratio
Ratio
increased decreased
Ratio
same
0.427
ROE
25.17%
Asset
turnover
$5,705.4
Year-end total Year-end total
liabilities
assets
Place X in appropriate cell
Year-end
financial
leverage
0.690
Year-end
current ratio
$1,774.1
Adjusted 2012 numbers
1.402
(n) Complete the table below to estimate how Darden’s expenses would have changed in 2013-2021 if it had
capitalized its operating leases at the end of fiscal 2012:
Capitalizing operating leases: capital versus operating expense
Expense if operating leases capitalized
Year
2013
Amortization Interest expense
of lease asset on lease liability
$129.18
$31.95
Total expense
$161.13
Expense if
operating
leases not
capitalized
Capital
expense less
operating
expense
$151.50
$9.63
2014
2015
2016
2017
2018
2019
2020
2021
Total
(o) Assuming Darden capitalized its operating leases at the end of fiscal 2012, record the (fictitious) journal
entry the company would have recorded during fiscal 2013 to recognize the expense associated with these
leases. Write your entry in the space below using the accounts on page 9.
Recognizing 2013 expense for capitalized operating leases
Debit
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 18
Credit
8
NAVIGATING ACCOUNTING®
(p) For the entry you recorded in (o), complete the table below identifying the Darden’s financial statement line
items that would have been directly affected (and the direction of the effects). Assume the numbers reported
in fiscal 2013 have the same signs as those reported in fiscal 2012.
Recognizing 2013 expense for capitalized operating leases
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF EARNINGS
Increases
Decreases
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Line Items
Increases
Decreases
Line Items
Increases
Decreases
STATEMENT OF CASH FLOWS
Line Items
Increases
Decreases
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 19
9
EXERCISE
CHART OF ACCOUNTS
ASSETS
Current
AR
Accounts receivable
ARG
Accounts receivable, gross
Allbd
Allowance for bad debts
Cash and cash equivalents
Inventories
Minv
Materials inventories
WIP
Work in process
FGI
Finished goods inventories
SIdr
Segregated inventories: deferred revenue
Prepaid expenses
Other current assets
C
Inven
PrEx
OCA
Non-current
PPE
Property, plant, and equipment, net
PPEhc
PP&E (historical cost)
PPEco
PP&E under construction
AcDep
Accumulated depreciation
CLA
Capital lease asset (historical cost)
CLAamt Accumulated amortization: capital lease asset
Acquired intangibles
Inthc
Intangibles (historical cost)
AcAmt
Accumulated amortization: intangibles
Long-term debt issuance costs
Other non-current assets
Intan
LTDic
ONCA
LIABILITIES
Current
AP
AcrInt
OthAcr
CPLTD
CPCLO
DivP
Drev
OCL
Accounts payable
Accrued interest
Other accrued liabilities
Current portion of long-term debt
Current portion of capital lease obligation
Dividend payable
Deferred revenue
Other current liabilities
Non-current
LTD
CLO
ONCL
Long-term debt
Capital lease obligation
Other non-current liabilities
OWNERS' EQUITY
Permanent
RE
SCap
OPOE
Retained earnings
Share capital
Other permanent owners' equity
Net income
AmtEx
CGS
DepEx
FinEx
G/L
IncS
MSGA
Rev
OOI
ONOI
Amortization expense
Cost of goods sold
Depreciation expense
Finance expense
Gain/loss
PPEGL
Gain/Loss on PP&E disposals
Income summary
Miscellaneous SG&A expense
Revenues, net
Other operating income net of expenses
Other non-operating income net of expenses
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 20
10
NAVIGATING ACCOUNTING®
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
May 27, 2012 May 29, 2011
ASSETS
Current assets:
Cash and cash equivalents
Receivables, net
Inventories
Prepaid income taxes
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Land, buildings and equipment, net
Goodwill
Trademarks
Other assets
Total assets
$70.5
71.4
404.1
12.2
74.9
124.5
$757.6
3,951.3
538.6
464.9
231.8
$70.5
65.4
300.1
5.2
77.0
145.6
$663.8
3,622.0
517.1
454.0
209.7
$5,944.2
$5,466.6
$260.7
262.7
$251.3
185.5
154.3
0.0
60.4
231.7
349.9
454.4
$1,774.1
1,453.7
312.9
167.1
9.3
64.3
200.0
0.0
409.3
$1,286.8
1,407.3
345.4
204.4
54.4
186.2
56.0
302.7
$4,102.2
248.7
$3,530.4
2,518.8
0.0
3,172.8
(3,695.8)
(146.6)
(7.2)
$1,842.0
$5,944.2
2,408.8
0.0
2,921.9
(3,325.3)
(59.8)
(9.4)
$1,936.2
$5,466.6
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Short-term debt
Accrued payroll
Accrued income taxes
Other accrued taxes
Unearned revenues
Current portion of long-term debt
Other current liabilities
Total current liabilities
Long-term debt, less current portion
Deferred income taxes
Deferred rent
Obligations under capital leases, net of current installments
Other liabilities
Total liabilities
Stockholders' equity:
Common stock and surplus, no par value. Authorized 500.0 shares; issued 289.0
and 287.2 shares, respectively; outstanding 129.0 and 134.6 shares, respectively
Preferred stock, no par value. Authorized 25.0 shares; none issued and outstanding
Retained earnings
Treasury stock, 160.0 and 152.6 shares, at cost, respectively
Accumulated other comprehensive income (loss)
Unearned compensation
Total stockholders' equity
Total liabilities and stockholders' equity
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Darden Restaurants' 2012 10-K, sec.gov
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 21
11
EXERCISE
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
Sales
Costs and expenses:
Cost of sales:
Food and beverage
Restaurant labor
Restaurant expenses
Total cost of sales, excluding restaurant depreciation and amortization
of $326.9, $295.6 and $283.4, respectively
Selling, general and administrative
Depreciation and amortization
Interest, net
Total costs and expenses
Earnings before income taxes
Income taxes
Earnings from continuing operations
Losses from discontinued operations, net of taxbenefit of $0.7, $1.5,
and $1.5, respectively
Net earnings
Basic net earnings per share:
Earnings from continuing operations
Losses from discontinued operations
Net earnings
Diluted net earnings per share:
Earnings from continuing operations
Losses from discontinued operations
Net earnings
Average number of common shares outstanding:
Basic
Diluted
Dividends declared per common share
May 27, 2012
$7,998.7
May 29, 2011
$7,500.2
May 30, 2010
$7,113.1
2,460.6
2,502.0
1,200.6
2,173.6
2,396.9
1,129.0
2,051.2
2,350.6
1,082.2
$6,163.2
746.8
349.1
101.6
$7,360.7
638.0
(161.5)
$476.5
$5,699.5
742.7
316.8
93.6
$6,852.6
647.6
(168.9)
$478.7
$5,484.0
690.7
300.9
93.9
$6,569.5
543.6
(136.6)
$407.0
(1.0)
$475.5
(2.4)
$476.3
(2.5)
$404.5
$3.66
(0.0)
$3.65
$3.50
(0.0)
$3.48
$2.92
(0.0)
$2.90
$3.58
(0.0)
$3.57
$3.41
(0.0)
$3.39
$2.86
(0.0)
$2.84
130.1
133.2
$1.72
136.8
140.3
$1.28
139.3
142.4
$1.00
Darden Restaurants' 2012 10-K, sec.gov
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 22
12
NAVIGATING ACCOUNTING®
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions, except per share data)
Common
Stock
And
Surplus
$2,183.1
Balances at May 31, 2009
Retained
Earnings
$2,357.4
Treasury
Stock
($2,864.2)
Accumulated
Other
Officer
Total
Comprehensive
Unearned
Notes
Stockholders'
Income (Loss) Compensation Receivable
Equity
($57.2)
($13.0)
($0.1)
$1,606.0
Net earnings
-
404.5
-
-
-
Other comprehensive income
-
-
-
(13.9)
-
-
(13.9)
Cash dividends declared ($1.00 per share)
-
(140.0)
-
-
-
-
(140.0)
Stock option exercises (2.9 shares)
404.5
55.00
-
0.0
-
-
59.3
33.6
-
-
-
-
-
33.6
-
-
0.0
-
-
-
-
-
(85.10)
Purchase Plan and other plans (0.3 shares)
6.1
-
Repayment of officer notes
0.0
-
Stock-based compensation
ESOP note receivable repayments
-
Income tax benefits credited to equity
20.1
Purchases of common stock for treasury (2.0 shares)
4.30
-
1.80
-
1.8
-
-
20.1
0.0
-
-
(85.1)
1.5
-
-
0.0
-
-
0.10
0.1
($71.1)
$1,894.0
Issuance of treasury stock under Employee Stock
Balances at May 30, 2010
$2,297.9
($11.2)
$0.0
-
476.30
-
0.0
-
-
Other comprehensive income
-
-
-
11.3
-
-
11.3
Cash dividends declared ($1.28 per share)
-
(176.30)
-
0.0
-
-
(176.3)
Stock-based compensation
ESOP note receivable repayments
Income tax benefits credited to equity
Purchases of common stock for treasury (8.6 shares)
($2,943.5)
7.6
Net earnings
Stock option exercises (2.3 shares)
$2,621.9
-
476.3
53.1
-
2.6
-
-
-
55.7
33.90
-
-
0.0
-
-
33.9
-
-
-
-
1.8
-
1.8
17.70
-
-
0.0
-
-
17.7
-
-
(385.5)
-
-
-
(385.5)
Issuance of treasury stock under Employee Stock
Purchase Plan and other plans (0.2 shares)
Balances at May 29, 2011
6.2
$2,408.8
$2,921.9
1.1
($3,325.3)
-
-
-
($59.8)
($9.4)
$0.0
Net earnings
-
475.50
-
0.0
-
-
Other comprehensive income
-
-
-
(86.8)
-
-
Cash dividends declared ($1.72 per share)
Stock option exercises (2.2shares)
Stock-based compensation
ESOP note receivable repayments
Income tax benefits credited to equity
Purchases of common stock for treasury (8.2 shares)
7.3
$1,936.2
475.5
(86.8)
(224.60)
(224.6)
59.4
-
3.5
-
-
-
62.9
26.50
-
-
0.0
-
-
26.5
-
-
-
-
2.1
-
2.1
17.90
-
-
0.0
-
-
17.9
-
-
(375.1)
-
-
-
(375.1)
Issuance of treasury stock under Employee Stock
Purchase Plan and other plans (0.2 shares)
Balances at May 27, 2012
6.2
$2,518.8
$3,172.8
1.1
($3,695.8)
-
0.10
-
($146.6)
($7.2)
$0.0
7.4
$1,842.0
Darden Restaurants' 2012 10-K, sec.gov
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 23
13
EXERCISE
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions, except per share data)
Cash flows - operating activities
Net earnings
Losses from discontinued operations, net of tax
Adjustments to reconcile net earnings from continuing operations to cash flows:
Depreciation and amortization
Asset impairment charges, net
Amortization of loan costs
Stock-based compensation expense
Change in current assets and liabilities
Contributions to pension and postretirement plan
Loss on disposal of land, buildings and equipment
Change in cash surrender value of trust-owned life insurance
Deferred income taxes
Change in deferred rent
Change in other liabilities
Income tax benefits from exercise ofstock-based compensation credited to goodwill
Other, net
Net cash provided by operating activities of continuing operations
Cash flows - investing activities
Purchases of land, buildings and equipment
Proceeds from disposal of land, buildings and equipment
Purchases of marketable securities
Proceeds from sale of marketable securities
Cash used in business acquisitions, net of cash acquired
Increase in other assets
Net cash used in investing activities of continuing operations
Cash flows - financing activities
Proceeds from issuance of common stock
Income tax benefits credited to equity
Dividends paid
Purchases of treasury stock
ESOP note receivable repayments
Proceeds from issuance of short-term debt
Repayments of short-term debt
Repayments of long-term debt
Principal payments on capital leases
Proceeds from issuance of long-term debt
Payment of debt issuance costs
Net cash used in financing activities of continuing operations
Cash flows - discontinued operations
Net cash used in operating activities of discontinued operations
Net cash provided by investing activities of discontinued operations
Net cash (used in) provided by discontinued operations
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year
Cash flows from changes in current assets and liabilities
Receivables, net
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued payroll
Prepaid/accrued income taxes
Other accrued taxes
Unearned revenues
Other current liabilities
Change in current assets and liabilities
Fiscal Year Ended
May 27, 2012
May 29, 2011
May 30, 2010
$475.5
1.0
$476.3
2.4
$404.5
2.5
349.1
0.5
6.7
56.1
(191.4)
(22.7)
7.1
4.1
36.1
18.5
15.8
0.6
5.2
$762.2
316.8
4.7
2.8
66.6
12.2
(13.2)
6.9
(13.7)
28.8
17.1
(15.4)
0.2
2.2
$894.7
300.9
6.2
3.3
53.5
144.3
(0.6)
0.3
(7.7)
(10.2)
15.4
(14.4)
1.4
4.0
$903.4
(639.7)
3.3
(32.1)
21.3
(58.5)
(15.9)
($721.6)
(547.7)
7.0
(6.5)
5.1
0.0
(10.6)
($552.7)
(432.1)
12.5
(15.5)
12.8
0.0
(6.4)
($428.7)
70.2
17.9
(223.9)
(375.1)
2.1
2,321.0
(2,243.8)
(2.1)
(1.6)
400.0
(5.1)
($40.4)
63.0
17.7
(175.5)
(385.5)
1.8
1,454.9
(1,269.4)
(226.8)
(1.2)
0.0
($521.0)
66.3
20.1
(140.0)
(85.1)
1.8
401.2
(551.2)
(1.8)
(1.3)
0.0
($290.0)
(0.5)
0.3
($0.2)
70.5
$70.5
(2.1)
2.8
$0.7
(178.3)
248.8
$70.5
(1.4)
2.6
$1.2
185.9
62.9
$248.8
(6.1)
(103.0)
(6.6)
(10.2)
(13.3)
(16.3)
(3.9)
31.1
(63.1)
($191.4)
(5.9)
(79.3)
(5.0)
5.5
5.3
4.7
2.3
27.3
57.3
$12.2
(15.8)
26.2
(5.0)
27.6
23.6
52.7
1.8
26.9
6.3
$144.3
Darden Restaurants' 2012 10-K, sec.gov
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 24
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NAVIGATING ACCOUNTING®
Excerpts from Darden Restaurant’s 2012 10K
■
Note 9: Long-term debt
NOTE
9 - LONG-TERM
DEBT
The
components
of long-term
debt are as follows:
The components of long-term debt are as follows:
(in millions)
May 27, 2012
May 29, 2011
5.63% senior notes due October 2012
$350.0
$350.0
7.13% debentures due February 2016
100.0
100.0
6.20% senior notes due October 2017
500.0
500.0
4.50% senior notes due October 2021
400.0
0.0
6.00% senior notes due August 2035
150.0
150.0
6.80% senior notes due October 2037
300.0
300.0
ESOP loan with variable rate of interest (0.59% at May 27, 2012) due December 2018
Total long-term debt
Fair value hedge
Less issuance discount
Total long-term debt less issuance discount
5.9
8.0
$1,805.9
$1,408.0
3.2
3.7
(5.5)
(4.4)
$1,803.6
Less current portion
$1,407.3
(349.9)
Long-term debt, excluding current portion
$1,453.7
0.0
$1,407.3
Darden Restaurants' 2012 10-K, sec.gov
... “On October 11, 2011, we issued $400.0 million aggregate principal amount of unsecured 4.500 percent
senior notes due October 2021 (the New Senior Notes) under a registration statement filed with the SEC on
October 6, 2010. Discount and issuance costs, which totaled $5.1 million , are being amortized over the term
of the New Senior Notes using the straight-line method, the results of which approximate the effective interest method. Interest on the New Senior Notes is payable semi-annually in arrears on April 15 and October
15 of each year, commencing April 15, 2012. We may redeem the New Senior Notes at any time in whole or
from time to time in part, at the principal amount plus a make-whole premium. If we experience a change in
control triggering event, unless we have previously exercised our right to redeem the New Senior Notes, we
may be required to purchase the New Senior Notes from the holders at a purchase price equal to 101 percent
of their principal amount plus accrued and unpaid interest.”
Note 9 excerpts, pages 39-40, Darden Restaurants’ 2012 10-K.
■
Note 14: Leases
An analysis
of rent expense incurred related to restaurants in continuing operations is as follows:
An analysis of rent expense incurred related to restaurants in continuing operations is as follows:
NOTE 14 - LEASES
(in millions)
Restaurant minimum rent
Restaurant percentage rent
Restaurant rent averaging expense
Transportation equipment
Office equipment
Office space
Warehouse space
Total rent expense
2012
$130.9
5.6
12.9
3.5
0.6
1.0
0.6
$155.1
Fiscal Year
2011
$120.6
5.3
11.1
3.2
0.4
0.9
0.5
$142.0
2010
$111.7
5.1
10.0
3.3
0.8
4.5
0.5
$135.9
Darden Restaurants' 2012 10-K, sec.gov
The annual future lease commitments under capital lease obligations and noncancelable operating leases, including those related to restaurants reported as discontinued operations, for each of the five fiscal years subsequent to
May 27, 2012 and thereafter is as follows:
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 25
15
EXERCISE
(in millions)
Fiscal Year
2013
2014
2015
2016
2017
Thereafter
Total future lease commitments
Less imputed interest (at 6.5%)
Present value of future lease commitments
Less current maturities
Obligations under capital leases, net of current maturities
Note 14, page 48, Darden Restaurants’ 2012 10-K.
Note 15:
NOTE
15 - INTEREST,
The components
of interest,
net are as NET
follows:
The components of interest, net are as follows:
(in millions)
Fiscal Year
2012
Interest expense
$102.7
Imputed interest on capital leases
Capitalized interest
Interest income
2011
$93.7
2010
$95.7
3.7
3.8
3.9
(3.9)
(3.0)
(4.4)
(0.9)
Interest, net
Operating
$151.5
142.0
130.0
114.5
96.3
302.5
$936.8
Darden Restaurants' 2012 10-K, sec.gov
■
Capital
$5.2
5.4
5.5
5.6
5.8
67.2
94.7
(38.7)
56.0
(1.6)
$54.4
$101.6
(0.9)
$93.6
(1.3)
$93.9
Darden Restaurants' 2012 10-K, sec.gov
The components of earnings before income taxes from continuing operations and the provision
for income taxes thereon are as follows:
(in millions)
Interest paid, net of amounts capitalized
2012
$94.8
Fiscal Year
2011
$98.3
2010
$95.3
Darden Restaurants' 2012 10-K, sec.gov
Note 15, page 49, Darden Restaurants’ 2012 10-K.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 26
Deferred Expenses and Long-lived Assets » How Do I Use the Numbers » Exercises
www.navigatingaccounting.com
E X E R C I S E S
la.hun.010 Analyzing measurement and recognition: Extending HBS Kansas City
Zephyrs Case
This exercise examines expense recognition decisions in Harvard Business School’s
Kansas City Zephyrs Baseball, Inc. case through the lens of current US GAAP. There have
been significant changes to US GAAP since the case was written over twenty-five years
ago, especially with regards to accounting for business combinations (such as acquiring
another company). We’re also going to use the case to dig more deeply into recognition
and measurement issues associated with the four-question OEC-Map approach we have
been using to record entries:
• Should an asset be recognized?
Usage
This exercise helps
you learn how to
use accounting
information.
• Should an asset be de-recognized?
• Should a liability be recognized?
• Should a liability be de-recognized?
• If net assets (and thus owners’ equity) changes, use the OEC Map to identify the
affected owners’ equity items.
This exercise has open-ended questions that allow for several good alternative responses.
While there aren’t correct responses to the questions, some are definitely better than others. Generally, responses are better to the extent they identify and fully vet arguments,
counterarguments, and rebuttals, include appropriate qualifiers, and provide insights
regarding the way you assessed the relative merits of the arguments, counterarguments
and rebuttals. See The Toulmin Model of Argumentation as a reference.
Background Information
Asset Recognition
General
We have seen that two criteria must be met to recognize a resource as an asset: the resource
must satisfy the asset definition and it must be reliably measureable. These asset-recognition criteria are appropriate in all situations. However, there is a presumption under US
GAAP and IFRS that the fair values of all identifiable assets acquired through a business
combination can be measured reliably.
An asset is identifiable if it meets either of the following criteria:
a. It is separable, that is, capable of being separated or divided from the entity and
sold, transferred, licensed, rented, or exchanged, either individually or together
with a related contract, identifiable asset, or liability, regardless of whether the
entity intends to do so.
b. It arises from contractual or other legal rights, regardless of whether those rights
are transferable or separable form the entity or from other rights and obligations.
Financial Accounting Standards Board Glossary
Assets that don’t meet these criteria are part of goodwill. Importantly, under US GAAP
and IFRS identifiable assets are only presumed to be reliably measureable if they are
acquired through a business combination (or separately purchased from a third party). As
You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons
Attribution-Noncommercial-Share Alike United States license. © 1991–2013 NavAcc LLC.
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Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 27
Judgment
This exercise helps
you learn how to
analyze accounting judgments.
Purchasing the Case
The Kansas City Zephyrs Baseball
case can be purchased on-line at
http://hbr.org/product/kansascity-zephyrs-baseball-club-inc/
an/187088-PDF-ENG
2
NAVIGATING ACCOUNTING®
a result, many identifiable intangibles such as brands, trademarks and customer lists are only recognized as assets
if they were acquired from third parties (separately or through business combinations).
At the time they are acquired, identifiable intangible assets are classified as having or not having definite lives.
Assets with definite lives are amortized over these lives. Assets without definite lives are not amortized, but they
must be tested for impairment annually. For example, trademarks are often classified as intangible assets with
indefinite lives. By contrast, patents are always classified as intangibles with definite lives.
Kansas City Zephyrs
There are two important asset recognition decisions in the KCZ case:
• Signing bonuses: Should signing bonuses be recognized as assets when paid and amortized over the
years of the employment contracts or expensed immediately? Here you must determine whether signing
bonuses meet the definition of an asset and if so, whether the future benefits can be measured reliably.
• Initial roster depreciation: For reasons given later, we are going to focus on a broader set of intangibles
and the following questions: Assuming current GAAP had been applicable when KCZ was acquired,
would one or more identifiable intangible assets have been recognized? If so, which of these would have
been classified as having definite lives and thus been amortized?
When determining whether a specific intangible asset would have been recognized at the time KCZ was
acquired, you will need to determine whether the asset meets one of the two criteria mentioned earlier: whether
it is separable or arises from contractual rights. Here is a related quote regarding players’ contracts:
“Employment contracts may result in contract-based intangible assets or liabilities [ASC 805-20-55-36;
IFRS 3.IE37]. An employment contract may be above or below market in the same way as a lease (see BCG
4.3.4.6) or a servicing contract. However, the recognition of employment contract intangible assets and
liabilities is rare in practice. Employees can choose to leave employment with relatively short notice periods,
and employment contracts are usually not enforced. In addition, the difficulty of substantiating market compensation for specific employees may present challenges in measuring such an asset or liability.
An exception might be when a professional sports team is acquired. The player contracts may well give rise
to employment contract intangible assets and liabilities. The athletes often work under professional restrictions, such that they cannot leave their contracted teams at will and play with another team to maintain
their professional standing. Player contracts may also be separable, in that they are often the subject of
observable market transactions.”
A Global Guide to Accounting for Business Combinations and Noncontrolling Interests Application of the U.S. GAAP
and IFRS Standards, PWC, Section 4.3.4.2
A player’s contract could be recognized as an asset or liability depending on whether it is above or below market
at the time of the acquisition.
For example, suppose:
■ A player signed a five-year contract one year before his team was acquired for $1.2 million per year.
■ He had a fabulous first year under the contract.
■ At the time of the acquisition, a comparable player would likely be paid $1.5 million per year for a fouryear contract.
Given these facts:
■ The acquiring team would record a “roster” asset for the present value of $0.3 million each year for the
next four years ($0.3 = $1.5 -$1.2).
■ Each year during the contract, the acquiring company would recognize:
(i) Interest income on the asset (based on the discount rate used to determine the present value).
(ii) The following compensation entry: increase (debit) compensation expense $1.5, decrease (credit)
cash $1.2, and decrease (credit) the roster asset for $0.3.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 28
3
E X E R C I S E L A . H U N . 010
Liability Recognition
General
We have seen that generally three criteria must be met to recognize an obligation as a liability: the obligation
must satisfy the liability definition; it must be reliably measureable; and it must be probable. Under IFRS, an
obligation is probable if a related outflow of resources is more likely than not to occur (greater than a 50%
chance). Probable is not defined under US GAAP but is usually interpreted to mean somewhere between a
70-80% chance of occurrence.
Kansas City Zephyrs
There are two liability recognition decisions in the KCZ case:
• Deferred compensation: Should KCZ recognize a liability for compensation earned in the current year
that will be paid in future years?
• Nonroster guaranteed payments: Should KCZ recognize a liability for future payments to the two
injured players? At issue here is whether this contract is “onerous,” meaning the future benefits are
expected to be less than the future costs, so a loss is expected. Recall that assets and liabilities associated
with executory contracts are generally not recognized (where an executory contract is one where both
parties have substantial remaining performance obligations). There is an exception when an executory
contract is onerous.
Measurement
General
When analyzing financial statements, you need to qualitatively gauge the reliability of measures reported therein
to assess the extent to which they should influence your conclusions. How faithfully do the numbers represent the
underlying economic activity? To what extent would objective experts agree on the measures? Would objective
experts’ measures for the same activity be widely dispersed, narrowly dispersed, or somewhere in between?
For example, we would expect objective experts’ measures of the fair values of cash and cash equivalents to be narrowly dispersed (where the fair value of an asset is the price it could be sold for to a willing buyer); their measures
of the fair values of goodwill to be pretty widely dispersed; and their measures of the fair values of property, plant
and equipment to be somewhere in between.
Three factors largely explain the dispersion of objective experts’ measures:
1. The measurement objective, method, inputs and scope. For example, the measurement objective
might be fair value or adjusted historical cost. If the measurement objective was to determine the accumulated depreciation associated with the adjusted historical cost of PP&E, the measurement method
might be straight-line or accelerated depreciation. If straight-line, the inputs would include the length of
time the asset is expected to be in use and the estimated value of the asset at the end of this period. The
scope of the measurement, also called the unit of account, refers to the number of items that are measured as one unit. For example, a building might be depreciated as a single unit of account or various
parts of the building (roof, wiring, etc.) might be depreciated separately.
2. Uncertainty associated with the underlying economic activities being measured. Ceteris paribus
(everything else equal), the greater the uncertainty, the wider the dispersion of objective experts’ measures. However, to the extent representative benchmark data is available, the dispersion associated with
underlying uncertainty can be mitigated.
3. Availability of representative benchmark data. Measurement inputs are often based on estimates,
which are averages or other statistics associated with samples of historical or cross-sectional data. For
example, estimates of expected future receivable write-offs are often based on historical averages and
estimates of assets fair values are often based on the average sales price of recent sales of comparable
assets. Benchmark data is representative to the extent the related underlying economic activity is
comparable to the economic activity being measured. For example, historical receivable write-offs are
representative of expected future write offs when the economy is stable but not representative when
economic conditions are rapidly eroding, as they did in 2008.
If all management teams were objective experts, you could gauge the reliability of reported numbers solely by
assessing these three factors. To the extent objective experts’ measures would be widely dispersed, you also need
to qualitatively gauge the objectiveness and expertise of the management team that prepared the numbers. For
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 29
4
NAVIGATING ACCOUNTING®
some business activities, applying GAAP can be very challenging, allowing the possibility for honest errors. Also,
to the extent objective experts’ measures would be widely dispersed, opportunistic management teams have room
to manipulate reported numbers.
Standard setters tend to restrict measurement latitude when the dispersion of objective experts’ measures would
otherwise be problematic because of honest errors or opportunistic reporting. A relevant example for this exercise
is the criterion that resources can only be recognized as assets when they can be measured reliably. Still, as indicated earlier, reliability spans a very broad continuum and GAAP is silent regarding the threshold when measures
become reliable enough for recognition. Instead, GAAP specifies situations where standard setters have concluded
asset measures would not be reliable. Notable examples are the future benefits associated with research and advertising, whose costs must be expensed as incurred rather than capitalized as assets.
These examples highlight a subtle aspect of what it means to say an asset is reliably measureable. Typically, the issue
is not whether the asset can be measured reliably when it is acquired. For example, the historical costs associated
with research and advertising can be measured reliably. Rather, the bigger issue is whether the benefits expected
to be received at future dates can be measured reliably. For example, there is considerable uncertainty regarding
whether and when the benefits associated with most research will be realized. This means that if an asset was recognized when research costs were incurred, testing for impairment at future dates or otherwise determining when
the asset should be de-recognized through amortization would be problematic.
Knowing how the availability of representative benchmark data affects the dispersion of objective experts’ measures can help you understand the evolution of GAAP. The availability of representative benchmark data has
expanded greatly during the past couple of decades with the expansion of global markets and rapid evolutions in
technology, which have resulted in “big data.” As better data has emerged, fair-value measurements have become
more pervasive. In fact, they were largely nonexistent prior to 1990.
There is another aspect of GAAP that is particularly relevant to this exercise. Sometimes new standards are not
consistent with existing standards that fall outside the scope of the new standards. For example, since 2008 when
the IASB and FASB revised the business combination standards, there has been a presumption that the fair values
of brands and other identifiable intangible assets acquired through a business combination can be measured reliably, yet the fair values of internally developed brands can’t be recognized because standard setters concluded long
ago that internally developed intangibles can’t be measured reliably. This seems to be a glaring inconsistency: the
measurement methods and inputs used to estimate brands’ fair values when a business is acquired and those used
thereafter to determine whether and when the brands should be amortized or impaired are largely independent of
the business combination. This suggests these methods and inputs would yield equally reliable measures for internally developed brands. As a result of this inconsistency, comparability across companies becomes problematic
when some companies develop intangibles internally that others acquire them through business combinations.
Kansas City Zephyrs
The reliability of reported measures and thus the extent to which they should influence decisions is inherently
contextual, depending, in particular, on the extent to which there is uncertainty about the related business activity and the availability of representative benchmark data. Accordingly, as you assess the reliability of various
measures in the KCZ case and the extent to which you should weigh concerns regarding these measures raised
by the players or owners, compare the availability of benchmark data in baseball and other sports to that available in other industries.
Drill deeper - beyond the scope of this exercise. A deeper discussion of measurement concepts and
the factors that affect the dispersion of measures is beyond the scope of this exercise. To learn more, watch
the following Navigating Accounting videos:
■
“Measurement Decisions”
www.navigatingaccounting.com/video/scenic-measurement-decisions
■
“Factors Diving the Dispersion of Ideal Measures”
www.navigatingaccounting.com/video/scenic-factors-driving-dispersion-ideal-measures
■
“Factors Diving the Dispersion of Actual Measures”
www.navigatingaccounting.com/video/scenic-factors-driving-dispersion-actual-measures
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 30
5
E X E R C I S E L A . H U N . 010
Part I: Signing bonuses
Your claim
(a) Fill in the blank with either players’ or owners’:
I support the [players’ or owners’]
accounting for signing bonuses.
Qualifiers
(b) Put an X at the spot on the scale on the next page that indicates the likelihood your claim is correct,
given information provided here and in the case, concepts covered thus far, and your general understanding of baseball.
After completing (c)-(e), put an X at the spot on the scale below that indicates the likelihood your claim is
correct, given the available information and concepts covered thus far. Your response should depend on the
strength of your arguments, counterarguments, and rebuttals to counterarguments.
Absolute
Uncertainty
Unlikely
Absolute
Certainty
Possibly
Likely
Probably
The Toulmin Method of Argumentation: The Second Triad, Keith Green
http://www.youtube.com/watch?v=-gRaC_vZiD8
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 31
6
NAVIGATING ACCOUNTING®
Your opening remarks
Assume you are presenting your analysis to an audience and you have decided that your opening remarks will
present your qualified claim and briefly preview the way you assess the relative strengths of your arguments, counterarguments, and rebuttals without explicitly stating them.
For example, you might state “Based on my analysis of available information, I have concluded that I support the
players’ accounting for signing bonuses. I will present three supporting arguments for this claim, two of which
are very compelling. I will also present two counterarguments. I will thoroughly refute one of these, but I can’t
provide a reasonable rebuttal for the other, which has sufficient merit for me to qualify my claim as likely rather
than probable.”
(c) Write your opening remarks below:
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 32
7
E X E R C I S E L A . H U N . 010
Your arguments
Provide no more than three arguments in support of your claim in the space provided below, numbered and
arranged according to your assessment of their strength (from strongest to weakest).
Consistent with The Toulmin Model, each argument should provide evidence, a warrant, and possibly backing
for the warrant. You need not identify the components. For example, you needn’t state here is my evidence and
here is its warrant. However, both must be present for each argument and while the warrant can be implied,
the evidence and backing must be explicit. Keep in mind that the quality of your response depends more on the
strength of the arguments you present rather than the number of arguments. For example, one exceptional argument may be all you need.
(d) Write your arguments below, conditional on concepts covered thus far, information provided here and
in the case, and your general understanding of baseball.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 33
8
NAVIGATING ACCOUNTING®
Counterarguments and rebuttals
Provide no more than three counterarguments to your claim, numbered and arranged according to your assessment of their challenge to the claim (from strongest to weakest). If possible provide rebuttals immediately below
each counterargument.
(e) Write your counterarguments and rebuttals below, conditional on concepts covered thus far, information provided here and in the case, and your general understanding of baseball.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 34
9
E X E R C I S E L A . H U N . 010
Part II: Deferred Compensation
Your claim
(f) Fill in the blank with either players’ or owners’:
I support the [players’ or owners’]
accounting for deferred compensation.
Qualifiers
(g) Put an X at the spot on the scale on the next page that indicates the likelihood your claim is correct,
given information provided here and in the case, concepts covered thus far, and your general understanding of baseball.
Follow the guidance for part (b).
Absolute
Uncertainty
Unlikely
Absolute
Certainty
Possibly
Likely
Probably
The Toulmin Method of Argumentation: The Second Triad, Keith Green
http://www.youtube.com/watch?v=-gRaC_vZiD8
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 35
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Your opening remarks
Assume you are presenting your analysis to an audience and you have decided that your opening remarks will
present your qualified claim and briefly preview the way you assess the relative strengths of your arguments, counterarguments, and rebuttals without explicitly stating them.
Follow the guidance for part (c).
(h) Write your opening remarks below:
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 36
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E X E R C I S E L A . H U N . 010
Your arguments
Provide no more than three arguments in support of your claim in the space provided below, numbered and
arranged according to your assessment of their strength (from strongest to weakest).
Follow the guidance for part (d).
(i) Write your arguments below, conditional on concepts covered thus far, information provided here and
in the case, and your general understanding of baseball.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 37
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NAVIGATING ACCOUNTING®
Counterarguments and rebuttals
Provide no more than three counterarguments to your claim, numbered and arranged according to your assessment of their challenge to the claim (from strongest to weakest). If possible provide rebuttals immediately below
each counterargument.
(j) Write your counterarguments and rebuttals below, conditional on concepts covered thus far, information
provided here and in the case, and your general understanding of baseball.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 38
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E X E R C I S E L A . H U N . 010
Part III: Non-roster guaranteed payments
Your claim
(k) Fill in the blank with either players’ or owners’:
I support the [players’ or owners’]
accounting for non-roster guaranteed payments.
Qualifiers
(l) Put an X at the spot on the scale on the next page that indicates the likelihood your claim is correct,
given information provided here and in the case, concepts covered thus far, and your general understanding of baseball.
Follow the guidance for part (b).
Absolute
Uncertainty
Unlikely
Absolute
Certainty
Possibly
Likely
Probably
The Toulmin Method of Argumentation: The Second Triad, Keith Green
http://www.youtube.com/watch?v=-gRaC_vZiD8
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 39
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NAVIGATING ACCOUNTING®
Your opening remarks
Assume you are presenting your analysis to an audience and you have decided that your opening remarks will
present your qualified claim and briefly preview the way you assess the relative strengths of your arguments, counterarguments, and rebuttals without explicitly stating them.
Follow the guidance for part (c). (m)Write your opening remarks below:
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 40
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E X E R C I S E L A . H U N . 010
Your arguments
Provide no more than three arguments in support of your claim in the space provided below, numbered and
arranged according to your assessment of their strength (from strongest to weakest).
Follow the guidance for part (d).
(n) Write your arguments below, conditional on concepts covered thus far, information provided here and
in the case, and your general understanding of baseball.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 41
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NAVIGATING ACCOUNTING®
Counterarguments and rebuttals
Provide no more than three counterarguments to your claim, numbered and arranged according to your assessment of their challenge to the claim (from strongest to weakest). If possible provide rebuttals immediately below
each counterargument.
(o) Write your counterarguments and rebuttals below, conditional on concepts covered thus far, information provided here and in the case, and your general understanding of baseball.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 42
E X E R C I S E L A . H U N .010
Part IV: Identifiable Intangible Assets
The final disputed issue in the KCZ case considered here centers on initial roster depreciation. The case doesn’t
provide sufficient information about the initial roster asset to determine whether all or part of it would be depreciated under current GAAP. Perhaps the authors were intentionally vague to promote an open ended discussion of
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an analysis of issues that would likely arise under current GAAP.
Specifically, assume:
Ǵ $VSSFOU(""1GPSCVTJOFTTDPNCJOBUJPOTXBTBMTPBVUIPSJUBUJWFHVJEBODFJOXIFO,$;XBT
acquired (this is not true).
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owners:
■
$3,000 for the fair value of the KCZ brand
■
$3,000 for the fair value of the players’ contracts in excess of the value of the scheduled payments.
These contracts all had 6 years of remaining life at the time of the acquisition.
■
$3,000 for the fair value of KCZ’s cohesive team culture. There was widespread agreement that
KCZ won most of its games because the players were highly focused on team goals, rather than on
individual accomplishments.
■ These three were classified as identifiable assets with definite lives at the time of the acquisition and the
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BUUIFFOEGJTDBM5IJTJTUIFTBNFBTUIFCPPLWBMVFPGUIFJOJUJBMSPTUFSJOUIFDBTF
Required
(p) If you were asked to serve as a neutral arbitrator in the dispute between the players and owners and you
concluded the initial measurements of the three intangibles identified above were all reasonable, what
adjustments, if any, would you make to the $2,000 of related fiscal 1984 expense reported by the owners.
Write your response in the space below, providing arguments defending your adjustments.
To this end, for each of the three intangibles, determine whether you agree with the owners that the item
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ZPVBHSFFUIBUJUTIPVMEIBWFCFFODMBTTJGJFEBTIBWJOHBEFGJOJUFMJGFBOEUIVTUIBUJUTIPVMECFBNPSUJ[FE
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
17
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NAVIGATING ACCOUNTING®
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E X E R C I S E L A . H U N . 010
Part V: Summary
Required
(q) If you were asked to serve as a neutral arbitrator in the dispute between the players and owners, summarize the adjustments you would make, if any, to the 1984 expenses reported by the owners, restricting
your analysis to the expenses in Parts I-IV and maintaining the assumptions in Part IV. If you conclude
an expense should be excluded for the purpose of negotiating compensation, even if the expense would
be recognized under GAAP, state your reasons for the exclusion.
Write your response below.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 45
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NAVIGATING ACCOUNTING®
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Long-term Assets, Long-term Debt, and Leases Assigned Exercises Page 46