Posted by & filed under All Articles, Financial Reporting and Analysis, Financial Statement Analysis, Intermediate Accounting.

New rules were announced on November 16, 2009, regarding stricter rules to govern fees and expiration dates for gift cards, gift certificates, and general use pre-paid cards. While the rules have not be enacted and are open for comment for the next month, proposals include the prohibition of dormancy fees for a year and the extension of expiration periods to at least five years from the time the funds were loaded and the card sold and issued.

QUESTIONS:

  1. How would you classify gift cards on the financial statements?
  2. If a $50 gift card has a five year period before it expires, how should the company selling the card recognize income on it?
  3. Under the proposed changes, issuers can still charge inactivity fees for gift cards, are limited to one fine per month after a 12-month period. In addition, monthly maintenance fees, balance-inquiry fees and re-loading fees will be allowed. How should these fees be recorded by the issuing companies?

SOURCE: Jaffe, C. “No Gifts, Please,” Wall Street Journal- Market Watch (Retrievable online at http://www.marketwatch.com/story/gift-card-fees-keep-on-giving-to-card-issuers-2009-11-18)

Posted by & filed under All Articles, Intermediate Accounting.

The South Africa-based company, Harmony Gold, is having problems securing ongoing funding after using up more than $1 billion U.S. Its latest quarterly report shows that the company is grappling to produce free cash flow.

QUESTIONS:

  1. What is free cash flow and why is this a worry for the company?
  2. With respect to free cash flow, why was it a good sign to analysts that Harmony paid its first dividend in five years on September 21, 2009?
  3. Explain each of the following in terms of helping or hurting Harmony’s free cash flow position:
    1. Cash raised from selling residual shares in Gold Fields, after an earlier bid for the company failed.
    2. Incremental cash increases earned from the rising price of gold sales
    3. Significant projects to replace aging assets used in the mining process

SOURCE: Sergeant, B. “For Harmony Gold, Free Cash Flow Remains Elusive,” Mineweb – Gold News (Retrievable online at http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=91685&sn=Detail)

Posted by & filed under All Articles, Financial Reporting and Analysis, Financial Statement Analysis, Intermediate Accounting.

Marriott International, the well-known hotelier, saw operating losses in its third quarter of 2009, as a result of its venture to move into financing time-shares during a slowing real estate market. In addition, the sluggish economy has not helped its primary business segment that caters to cash-based lodging for business and leisure travelers. As a result, Marriott’s credit profile shows a somber ‘BBB-‘ debt rating assigned to its long-term debt, which some describe as on the border between investment and junk bond status. In fact, some analysts are worried that Marriott may violate its key loan covenant: its leverage ratio.

QUESTIONS:

  1. What is a junk bond?
  2. Why is this borderline rating a bad thing for Marriott?
  3. Explain what a loan covenant ratio is. Assuming that Marriott’s covenant is tied to either the debt to equity ratio or the cash debt coverage ratio, describe how aggressively managing costs and accelerating debt reduction would help Marriott avoid a violation of its covenant.

SOURCE: Phillips, D. “Timeshare Business Unwelcome Guest at Marriott International,” BNET – Companies in the Buzz (Retrievable online at http://industry.bnet.com/travel/10003824/timeshare-business-unwelcome-guest-at-marriott-international/)

Posted by & filed under All Articles, Intermediate Accounting.

In an 11th-hour effort to avoid filing for Chapter 11 bankruptcy, commercial lender CIT Group Inc. offered its bondholders a debt exchange. The exchange offer expired on October 29, 2009. According to this exchange plan, CIT bondholders of older notes would receive between $700 and $900 in new debt plus between 0.41 and 3.26 of new preferred shares for every existing $1,000 bond tendered.

QUESTIONS:

  1. Explain how this exchange would benefit CIT Group Inc. What are the potential costs or benefits for the bondholder?
  2. Assume that you are a bondholder that takes advantage of the exchange. You hold 5 bonds and exchange them for $800 plus 3 shares of new preferred stock when the stock has a stated value of $1.20 per share. What journal entry would you make?
  3. Assume the same information as in question 2 and make the journal entry that CIT Group Inc. would record on the exchange date.

SOURCE: Blandeburgo, B. “CIT Offers Debt Exchange, Draws Up Bankruptcy Plans,” Money Morning (Retrievable online at http://www.moneymorning.com/2009/10/03/cit-banking/)