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Accounting for Managers -- ACCT 6305 Assignment 3 Part I: Financial Statement Analysis 1. Selected balance sheet and income statement information for Facebook Inc. follows. $ millions

Dec 31, 2018

Dec 31, 2017

Total assets Total liabilities Revenue Net income

97,334 13,207 55,838 22,112

84,524 10,177

Return on equity (using the definition in the class slide) the year ended December 31, 2018 is: a. b. c. d.

27.91% (=22,112/[(97,334-13,207+84,524-10,177)/2] 24.32% 22.72% 26.28%

2. Based on the same information as in Question 1, return on assets (using the definition in the class slide) for the year ended December 31, 2018 is: a. b. c. d.

27.91% 24.32% (=22,112/[(97,334+84,524)/2]) 22.72% 26.28%

3. Selected balance sheet and income statement information from Version Communications Inc. follows (for balance sheet accounts, the numbers are the balances at the end of the year). $ millions Current assets Current liabilities Total liabilities Equity Earnings before interest and taxes Interest expense, gross Net cash flow from operating activities

2018 34,636 37,930 382,308 54,710 22,278 4,833 34,339

The current ratio for Verizon at the end of 2018 is: a. 1.36 1

2017 29,913 33,037 391,875 44,687 27,425 4,733 24,318

b. 0.91 (=34,636/37,930) c. 0.74 d. 1.10 4. Based on the same information as in Question 3, times interest earned (using the definition in the class slide) for 2018 is: a. b. c. d.

4.61 (=22,278/4,833) 5.79 7.11 5.14

5. Based on the same information as in Question 3, the liabilities-to-equity ratio at the end of 2017 (using the definition in the class slide) is: a. b. c. d.

0.14 0.11 6.99 8.77 (=391,875/44,687)

Part II: Bond Amortization Schedule O’Biren Corporation issues bonds with $8,000,000 face value and 8% coupon rate (paid semi-annually), which mature in 5 years. The market initially prices these bonds to yield 6%, compounded semi-annually. Prepare the bond amortization schedule following the format below. Please round up the number to one dollar. Please do this in Excel first and then copy the numbers to the table below.

Period 1 2 3 4 5 6 7 8 9 10

Bond Liab. Beginning Balance 8,682,416 8,622,889 8,561,575 8,498,423 8,433,375 8,366,377 8,297,368 8,226,289 8,153,078 8,077,670

Coupon Amount

Interest Expense

Change in Bond Liab.

320,000 320,000 320,000 320,000 320,000 320,000 320,000 320,000 320,000 320,000

260,472 258,687 256,847 254,953 253,001 250,991 248,921 246,789 244,592 242,330

59,528 61,313 63,153 65,047 66,999 69,009 71,079 73,211 75,408 77,670

Bond Liab. Ending Balance 8,622,889 8,561,575 8,498,423 8,433,375 8,366,377 8,297,368 8,226,289 8,153,078 8,077,670 8,000,000

Part III: Long-Term Liabilities 1. What is the present value of $120,000 received 10 years from now if the annual interest is 10% compounded semi-annually? 2

a. b. c. d.

46,265 45,227 (=120,000/(1+0.05)20) 46,213 45,210

2. Abbington Inc. issues bonds with face value $700,000, coupon rate 9% (paid semiannually), which mature in 10 years. If the market interest rate is 8% per year compounded semi-annually, the issue price would be: a. b. c. d.

747,566 (=700,000/(1+0.04)20+700,000*(9%/2)*(1/0.04)*[1-1/(1+0.04)20]) 656,382 747,511 656,377

3. On January 1 of the current year, CCH Corporation entered into the following lease contract. Based on the fact, CCH Corporation classifies the lease as an operating lease. Leased asset: Office Space Annual lease payment: $115,487 due at each year-end Lease term: 5 years Upfront fees: $10, 000 paid in cash Assuming that the company reports under the new lease accounting standard and that the discount rate is 5%, what is the amount of lease liability that CCH will add to its balance sheet at the inception of the lease? a. b. c. d.

499,998 (=115,487*(1/0.05)* [1-1/(1+0.05)5]) 509,998 498,998 519,998

4. Based on the same information in Question 3, what is the amount of lease asset that CCH will add to its balance sheet at the inception of the lease? a. b. c. d.

499,998 509,998 (=499,998+10,000) 498,998 519,998

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5. Refer to lease footnote extracted from Nordstrom’s 10-K report filed with the SEC for the fiscal year ended on January 28, 2006. All numbers are reported in thousands (i.e., as reported by Nordstrom).

Using a discount rate of 10%, what is the magnitude of the off-balance sheet lease liability on January 28, 2006? Note that the company reported under the old lease accounting standard. For this question, assume that after the fiscal year 2010 operating lease payments will be evenly split over the following five years. Assume that all payments are made at the end of each year. (Hint: You simply need to calculate the present value of future operating lease payments) a. approximately $15,474 b. approximately $680,642 c. approximately $453,508 d. approximately $422,392 Operating lease payments 73,389 73,296 70,525 67,892 63,524 66,403 66,403 66,403 66,403 66,403

PV 66,717 60,575 52,986 46,371 39,443 37,483 34,075 30,977 28,161 25,601 422,392

Part IV: Cost Behaviour and Cost Estimation 1. Cari German uses gas to heat her home. She has accumulated the following information regarding her monthly gas bill and monthly heating degree-days. The heating degree-days value for a month is found by first subtracting the average temperature for each day from 65 degrees and then summing these daily amounts together for the month. 4

Month February April

Heating Degree-Days 1,900 600

Gas Bill $254 $101

What will be the increase in Cari's monthly gas bill per heating degree-day using the high-low method? a. $0.3309 b. $0.1177 (=(254-101)/(1,900-600)) c. $46.00 d. $153.00 2. As volume increases, which of the following statements is not correct? a. Variable cost per unit will remain the same. b. Total fixed will remain the same. c. Average cost per unit will increase. d. Total variable costs will increase. The following information applies to problems 3-5 The following data was input into a spreadsheet program to determine the Intercept, Slope and R2 (RSQ) for Patient Days and Maintenance Costs for a local hospital: Month January February March April May June July

Patent Days (X) 6,600 8,100 6,000 7,500 8,300 9,000 5,200

Intercept Slope RSQ

$5,468 $0.541 0.79

Maintenance Costs (Y) $8,900 $9,500 $8,400 $9,200 $10,100 $10,800 $8,800

3. The estimated fixed maintenance cost for the hospital is: a. $5,468 (Intercept is fixed costs) b. $3,431 c. $0.759 d. $0.683 4. The estimated variable maintenance cost per patient day for the hospital is: a. $3,088 b. $3,431 c. $0.759 d. $0.541 (Slop is variable cost per unit) 5. The estimated total maintenance cost for August based on an estimated 7,000 patient days is: 5

a. b. c. d.

$9,255 (= 5,468 + 7,000*0.541) $7,186 $7,985 $7,529

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